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Update on Overtime Pay for Salaried Employees

Several of your exempt employees may receive an interesting gift for the holidays this year: Non-exempt status. The U.S. Department of Labor (DOL) has changed the rules on overtime pay for salaried employees, raising the minimum threshold salary to $47,476 per year (nearly doubling the previous minimum of $23,660). The law is scheduled to go into effect on December 1, 2016.

In addition to raising the threshold on overtime for salaried employees, the final ruling is set to automatically update the salary threshold every three years, based on wage growth over time. The DOL states the changes will extend protections to 4.2 million workers across the U.S., including an estimated 370,000 workers in Texas alone. According to the DOL, the options for employers responding to the ruling are quite simple:

  1. Pay time-and-a-half for overtime work.
  2. Raise workers’ salaries above the new threshold.
  3. Limit workers’ hours to 40 hours per week.
  4. Some combination of the above.

Is it really that simple? Several experts answer with a resounding “No!”

According to a study from the Mercatus Center at George Mason University, some employers may look at reducing base salaries, cutting overall compensation and replacing workers with machines or higher-skilled workers. Fringe benefits may be on the chopping block, including commissions, equity holdings, bonuses and profit-sharing. And, says a study co-author, certain employers may consider hiring more senior-level employees who earn more than an exempt salary threshold to take a junior employee’s role in addition to other duties.

Even for organizations not looking to get creative in order to avoid turning currently exempt employees into non-exempt employees, the new ruling is expected to cause a major culture shift. Here’s why: Asking longtime salaried workers to suddenly start punching a time card throughout the day and clock out at the end of the day can be demoralizing.

“Employers can expect many employees to feel hurt and under-appreciated,” Alice Kilborn, SHRM-CP, a consultant on workplace litigation prevention in Albuquerque, N.M., explains to  “Many workers place a premium on the prestige of being considered an exempt or salaried employee—no matter how much we emphasize it’s just a categorization of pay and not a reflection of importance or level of contribution. [It] may seem like they’re being demoted.”

Within the next few months, as HR Dive’s Tom Starner points out, employers will need to tackle:

  • The technical requirements for implementing such changes in payroll systems.
  • The need to train newly non-exempt employees on timekeeping matters (and, potentially, to add more time clocks to account for the new population).
  • State law requirements to notify an employee of changes to the amount or method of pay in advance (in some states a pay period in advance).

However, says ValentineHR President Caroline Valentine, there is time to be strategic. “There are a lot of moving pieces to this thing and you’ve got until December 1 to be totally compliant with the rule, so there’s no need to rush into anything without thinking it all through and having a plan,” she recently wrote. She warns you’ll likely receive a variety of responses to the changes from newly non-exempt employees. “People will be scared, mad, happy, sad. Prepare for all of them.”

Valentine also asserts time-tracking and payroll systems have come a long way so there’s no reason to fear tracking employee time under the new ruling.

“There are many vendors of time-tracking and payroll software.  Some are created for specific industries, some are very mobile friendly, some are inexpensive,” she explains. “Basically, you can find some options. You can filter these options by products that calculate overtime, that integrate with your current payroll system, that have mobile apps and so forth. You may find that, instead of getting a lot harder, incorporating these systems into your operations makes life a whole lot easier.”

What questions do you have about the new rule on overtime pay for salaried employees? Have you started planning for the switch? What changes are you considering? Let us know! It’s an important change that deserves attention.


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