Payroll laws confuse businesses and employees alike when it comes to overtime requirements. Understanding employee classifications can help businesses grasp whether their employees are entitled to (or exempt from) overtime pay and under what conditions (and avoid penalties/fines).
In the U.S. some employees who work more than 40 hours per week must receive overtime pay at a rate of at least one-and-a-half times their regular hourly wage. Several exemptions exist, but it’s not always easy to know whether an employee falls under one of them.
Exempt Versus Nonexempt Employees
To determine whether employees are exempt from receiving overtime, businesses should first apply the salary threshold test. Does an employee receive a salary greater than the minimum threshold?
Employees currently exempted from federal overtime requirements are those who make a salary of at least $455 per week ($23,660 annually). Even those who earn less may still fall under one of several job-related exemptions if their primary duties fall into one of the following categories:
- Executive: Does the employee’s duty consist of managing other employees? Is she responsible for hiring, firing or promotions?
- Administrative: Is the employee engaged in non-manual office work related to management or general business operations?
- Learned/Creative Professional: Does the work require advanced, intellectual knowledge in a science or educational field? Alternatively, do their duties require inventiveness, imagination, originality or talent for the purpose of creative production?
- Computer Technology: Is the employee a programmer or engineer? Does he or she engage in systems analysis, hardware or software development, or some other role that incorporates the same skills?
- Outside Sales: Does the employee’s duty include converting sales, orders or contracts while travelling or otherwise engaged outside the physical location at which the business is primarily conducted?
Employees who make less than the required salary but fall into one of these categories are exempt from receiving required overtime pay.
Other exceptions also exist. Employers whose employees might otherwise have exemption under federal law might not have it under state law. In general, federal law — including the Fair Labor Standards Act, which governs overtime requirements — only applies to businesses engaged in interstate commerce, which can itself can be difficult to judge.
Imagine two truck drivers: one who hauls a highway trailer and the other a yardman at warehousing company. According to federal law, any truck driver involved in interstate commerce is exempt from overtime. In this example, the highway driver — who travels from state to state — would be exempt. The yardman, who only drives a truck on site, may be required to receive overtime, depending on applicable state laws.
Knowing which law applies is not always easy, and businesses should first consult with an attorney or trusted payroll advisor before making a choice-of-law decision.
Proposed Changes to Overtime Compensation Requirements
Recently, the Department of Labor has expressed an intent to more than double the minimum salary threshold to about $970 per week ($50,400 annually) in 2016. This new rule would drastically increase the number of employees who qualify for overtime payments.
Such an increase has happened before: In 2004, the exemption threshold was raised from $155 per week ($8,060 annually) to its current level.
Avoid Misclassification Penalties and Audits
Audits arising from employee complaints typically include a review of a company’s payroll practices over the preceding two-year period. Misclassification of overtime eligibility can cost businesses up to $1,100 in federal penalties per violation. In addition, many states allow employees to pursue remuneration for unpaid overtime. For example, Connecticut employers who fail to pay overtime or minimum wages must pay double damages as well as associated costs and reasonable attorney’s fees.
For employees who make less than $50,000 per year, and are used to working more than 40 hours per week, 2016 might just turn into a banner year. But the effects of the proposed overtime rule changes are difficult to predict: whether salaried employees will be re-classified as hourly by the thousands or base wages will decrease in the long term is anybody’s guess.
One thing is certain: Employers used to forgoing overtime considerations for their employees have a lot to think about before next year. They’re on the clock.