The Department of Labor recently passed final updates to the Fair Labor Standards Act’s (FLSA) White Collar Overtime Exemption. The last update was more than a decade ago. This new update pretty much doubles the salary threshold at which workers are eligible for time-and-a-half overtime pay if they work more than 40 hours per week.

Effective December 1, 2016, the minimum salary requirement for administrative, professional and executive exemptions increases from $23,660 per year to $47,476 per year (or $455 per week to $913 per week).

It’s critical to be clear on which of your staff should be classified as exempt employees. Engineering and architecture firms are largely comprised of executive, administrative and professional employees, which are classified as exempt, so these FLSA rules warrant a close inspection by your firm.

You should be asking questions such as: Do we have to pay the new, freshly degreed engineer-in-training or intern architect a higher minimum? Do we have to alter our firm’s entire salary structure? Do we need a reboot of our hiring policy?

The definition of who this could apply to in your firm:

• Executive, administrative, professional and outside sales employees who are paid on a salary basis are exempt from both the minimum wage and overtime provisions of the FLSA, as long as they are paid the new minimum. Be sure to research your front-desk admin staff – they may or may not be classified as non-exempt, depending on the duties of their job.

• Drivers, driver’s helpers, loaders and mechanics are exempt if employed by a motor carrier and if the employee’s duties affect the safety of vehicle operation in transporting passengers or property in interstate or foreign commerce.

• Highly compensated employees are exempt from the FLSA’s overtime requirements if they regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee and earn at least $134,004 (increased from $100,000) annually (beginning on December 1, 2016).

Where Most Firms Go Wrong

The exempt vs. non-exempt issue can be confusing. A typical mistake we see is when a firm believes that employees paid on a salary basis are automatically exempt from overtime pay requirements. Not true.

Even if you think you understand the exemption classifications, take the time to review them in depth – if you get this wrong, you are at risk for significant liability.

Review the DOL’s specific exemption rules, including a list of less commonly used FLSA exemptions.

Be sure to check with your state’s labor laws – there may be requirements beyond what the FLSA requires. Also, certain jobs are excluded from FLSA coverage. For example, many truck drivers are governed by the Motor Carriers Act.

Every three years, the DOL will adjust the minimum salary requirement, to keep it at the 40^th percentile of full-time salaried workers in the lowest-wage region. The first adjustment will be January 1, 2020 and the DOL will publish a notice of updated salary requirements at least 150 days prior.

Are You Ready for This?

A good summer project – assess whether your exempt employees meet the exemption tests. If any employee meets the administrative, professional or executive exemption and earns less than the new minimum, you‘ll need to either raise their salary or reclassify them as non-exempt and pay overtime when they work more than 40 hours in a week.

If you chose to raise the salaries, you now have the option of using nondiscretionary bonuses (announced in advance), incentive payments and commissions to fulfill up to 10 percent of the minimum salary requirement – but these must be paid at least quarterly. Adding to the complexity, employers may make a final catch-up payment no later than the next pay period at the end of the quarter if the bonus, incentive payment or commission was less than anticipated, and the employee’s weekly salary plus nondiscretionary bonuses, incentives and commissions does not equal or exceed 13 times the minimum weekly salary of $913.

According to Fortune, “various labor experts estimate upwards of 70 percent of businesses are not in compliance with the FLSA.” And misclassification of exempt vs. non-exempt status is the main reason. The tests are complex to wade through and understand. Work with your accountant, labor attorney and other tax advisors to be sure you are getting this right!

About the Author:  Mindy L. Wall, CPA, CGMA, CDA, is the tax partner with T. Wayne Owens & Associates, PC, a CPA firm with a singular focus on the design industry, providing accounting services, overhead audits, financial statement audits, tax returns and more to A/E/C firms. Contact her at mwall@twocpa.com.

You can meet with T. Wayne Owens & Associates at THRIVE 2016 - THE A/E/C INDUSTRY SUMMIT! They are a sponsor and exhibitor at the event to be held October 12-14 in Nashville. There are lots of reasons why you should join us in Nashville!  Over the years, CEOs, CFOs, COOs, and other senior-level A/E/C firm leaders from around the world have made sure they don’t miss out on this unique two-day event.  In fact, we see many firm leaders come with five, ten, or more members of their leadership team to absorb all that the conference has to offer.

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