Salaried Employee Overtime: Everything You Need to Know
Salaried employee overtime is compensation paid to employees who work on a salary basis and exceed 40 working hours during a given workweek.8 min read
What Is Salaried Employee Overtime?
Salaried employee overtime is compensation paid to employees who work on a salary basis and exceed 40 working hours during a given workweek. In 2016, the Obama administration initiated new rules for overtime which qualifies employees earning under $47,476 per year the opportunity to receive overtime pay. Policymakers will re-evaluate the wages threshold every three years.
Previously the threshold was $23,660 for salaried workers, which prevented many employees from receiving overtime pay. Authorities estimate that under the law, more than 4 million salaried employees will be eligible to receive overtime wages. With so many workers qualifying for overtime compensation, many may feel the design and purpose of the law has become validated, which was to ensure fair pay for people's hard work.
How Is Overtime Calculated?
For any hours an employee works over 40 hours in a workweek, under federal law, the worker is to receive an adjusted pay rate of one-and-a-half times his or her regular pay, or time and a half. Additionally, commissions, bonuses, and other compensation must get included in calculating the overtime rate.
Overtime requirements can vary from state to state. There are some state laws which require an employer to give overtime pay if the worker exceeds working a particular number of hours during a single workday.
What the New Law Changes for Salaried Employee Overtime
Before the new rules became active in 2016, the threshold for salaried workers to be eligible for overtime was $455 per week. If an employee earned less than that, he or she would receive overtime pay. Now, with the new law enacted, the threshold has doubled. Employees that make less than $913 per week can get compensated with overtime wages.
Worker Classifications Have Also Changed with New Overtime Laws
There are two types of employees in the workforce - exempt and nonexempt. The difference between the two categorizations is overtime pay eligibility; nonexempt workers qualify, and exempt employees do not. In other words, regardless of how many hours an exempt salaried employee works, he or she will get paid only a set amount of wages.
A worker must be paid on a salary basis, not hourly, and perform either professional, executive, or administrative duties for exemption status. The Fair Labor Standards Act (FLSA) regulates the entitlement of overtime pay for nonexempt employees. Although the criteria for being exempt does not consider salary alone, with the newly broadened threshold, formerly nonexempt workers could attain exempt status.
How the New Salaried Employee Overtime Rules Can Impact a Business
Workers are not the only ones affected by the new overtime regulations. Employers have new considerations and obligations as well. Perhaps one of the largest points of interest for companies is the reclassification of some workers. Employers have to decide if previously exempt employees who now do not meet the adjusted federal minimum should receive a salary increase or have them reclassified as nonexempt with their current pay.
Here is something for employers to consider when an employee is up for reclassification: Does the worker tend to do a considerable amount of overtime because of business needs or demands that cannot be reduced or avoided? If this is the case, it will make practical sense for the company to raise the worker's salary to meet the new minimum pay. The employee will remain exempt if he or she meets the other exemption qualifications as well. However, if the job does not call for overtime, the best choice may be to convert the employee to nonexempt status.
Figuring out if an employee is properly classified can get complicated. Not all laws are the same. An employer must ensure its compliance with local, state, and federal laws so that workers get paid correctly. A company has a legal responsibility to comply with regulations infallibly. It is advisable for an employer to consult a lawyer if assistance is needed.
Are the New Rules a Good or Bad Thing?
The changes impact workers across many different industries. They include:
- Hospitality and hotels
- Retail outlets
- Construction companies
- Tax preparers
- Professional services firms
- Department stores
The intended goal for the new salaried employee overtime rules created by the Wage and Hour Division of the Obama administration was to align salary levels of workers with the modern standards of living.
Many businesses will likely want to avoid experiencing a dramatic increase in costs and ultimately want to neutralize wage costs. For example, if a company does not increase the salaries of employees to qualify them as exempt - that way circumventing the responsibility to pay them overtime, the employer may change and shift job responsibilities in some cases to eliminate the need for overtime.
Some other changes that could occur in the workplace because of the new rules might be one of the following:
- The method of pay - An employee may be converted from salaried to an hourly worker if he or she makes considerably less than $47,476.
- Unpaid versus a paid break - Workers who have a nine-hour day, with an hour for lunch, could have an increase in pay per hour but will stop getting paid for their lunch break.
- Pay structures - An employer may adopt what it considers to be a more flexible system for paying its workers, which may mean giving employees incentives or discretionary bonuses while paying them a lesser salary.
- Promotions - If workers are currently not in a qualifying role for exempt status, but earn between $47,476 and $134,004 per year, they may be given managerial or administrative tasks to disqualify them from being able to receive overtime compensation.
The possible pitfalls of the new rules could be that companies with limited support staff and just a few dozen employees may experience additional administrative complexity. Alternatively, larger companies may respond to the regulatory demands by seeking consulting firm services - especially if there are many entry-level or low-paid workers employed there.
What Duties Qualify as Exempt?
When it comes to classifying an employee based on the job responsibilities they do, position descriptions or job titles have limited usefulness and weigh-in with little influence in the determination. For example, a secretary remains a secretary regardless if he or she is titled an administrative assistant. What matters the most is the actual job tasks performed. How the work of an employee fits into the overall operation of the company and the actual work tasks that get done is what an employer must evaluate.
Exempt job duties fall under three categories:
Administrative Job Duties
Out of the definitions of job duties that are exempt, perhaps, administrative duties are the most imprecise and elusive. However, there is a regulatory definition that says exempt administrative job duties:
- Involve the application of discretion and independent judgment about significant matters
- Is nonmanual or office work
- Directly connects to the general operations of the business, management, or the employer's customers
High-level employees who have the primary task of keeping the business running can have an administrative exemption. Distinguishing administrative employees from either production or being operational is a valuable rule of thumb. Administrative employees do not make the products a company sells. They provide support to production and operational employees and are considered "staff" as opposed to "line" workers.
Some examples of what administrative functions may involve are:
- Database, network, and internet administration, or some other computer-related jobs
- Tax and accounting
- Finance and payroll
- Public, government, investment, or shareholder relations
- Human resources
- Advertising and marketing
- Regulatory and legal compliance
- Records maintenance
Not all administrative work is exempt. Even if an employee's job is financially valuable to the employer, it does not make him or her administratively exempt. Another case of when nonmanual support or office work is not exempt would be jobs of clerical employees. Typically, administrative tasks that are exempt will involve exercising judgment and discretion with the power to affect a significant portion of the company or the entire business by making independent decisions on various matters.
There are a few different questions an employer could ask to help with a determination which may include:
- Is the employee authorized to diverge, without prior approval, from a policy of the company?
- Does the worker have the authority to interpret or contrive any company policies?
- Can the employee use his or her authority to obligate the employer to significantly impacting financial affairs?
- Are the worker's assignments majorly involved in overall operations of the business?
Jobs that require work on a help desk or similar jobs are not likely to be exempt, nor is work that involves making travel arrangements, filing, answering telephones, and preparing routine reports or filling out forms. These duties may be administrative but not high-level which makes them unqualified for the administrative exemption.
Secretaries, for example, perform administrative job duties, but it is unusual for their work to be exempt. Although, if for example, the employee is the secretary to the CEO, indeed he or she would be considered high-level and is an administratively exempt employee. However, some employers may give an employee a decorative title, like "administrative assistant," but when the company evaluates their job obligations, it is evident the worker is veritably doing nonexempt clerical work.
Executive Job Duties
For work to be considered as exempt executive job responsibilities, the employee:
- Has management as his or her primary responsibility
- Has input into other employees' job status, such as promotions, hiring, assignments, or firing
- Supervises at least two other employees on a regular basis
A rule of thumb in determining if the primary duty of an employee's position is management, an employer can look at whether the worker oversees a shift or a department. Otherwise, a determination requires a case-by-case evaluation.
To have input into staffing does not necessarily mean the employee is the final decision maker, but the worker's recommendations must be genuinely influential and given "particular weight." That means upper management takes the suggestions for personnel provided by the employee seriously. For executive exemption, providing such say should be a real part of the worker's job that he or she frequently does as a regular job duty.
Professional Job Duties
The traditional learned professions have work duties that are exempt. Some of the vocations considered are:
- Engineers with engineering degrees or an equivalent
- Registered nurses (not LPNs)
- Accountants (excludes bookkeepers)
- Scientists (not technicians)
- Any employees performing work that has long since gotten associated with traditional learned professions (uses advanced knowledge)
For professional exemption, the work done must:
- involve the exertion of judgment and discretion
- chiefly be intellectual
- require specialized training and education
A standard measure of professionally exempt employees is that they have education in fields that are academically more eminent than skilled trades or mechanical arts, which is usually beyond college with an advanced degree. However, if an employee has reached an equivalent level of education by alternative means and does similar work to that of those with advanced degrees, the worker could be classified as exempt.
Job duties performed by an employee can be exempt also if they are creative professional duties. Work in this subcategory may include:
- Some journalists
Employees in these types of creative jobs contribute a unique analysis or interpretation, and their work requires talent, invention, originality, or imagination.
Usually, it is uncontroversial and, for the most part, straightforward when identifying most employees who are professionally exempt. However, there are some cases when this is not true. If there is difficulty making the determination, the work that is genuinely done by a worker will require careful analysis.
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