Nasir and Matt discuss the increase in the salary thresholdfor exempt employees and how employerscan try to avoid paying overtime as a result.
Full Podcast Transcript
NASIR: Welcome to our podcast – padcast.
Welcome to our podcast where we cover business in the news and add our legal twist.
My name is Nasir Pasha.
MATT: And I’m Matt Staub. Padcost.
NASIR: Well, we’ll have the padcost next week. Today is our podcast.
But, man, huge news, right? I mean, this is something that we talked about last year – big impact for many listeners. I hope you listen carefully because this is – what is it? December 1st this new law will go into effect?
MATT: Well, the date I had in mind was I was going to ask you when we talked about this last year if you can remember.
NASIR: I was going to say summer.
MATT: Now, I’m forgetting. I think it was July 5th but I looked earlier just to see if you’d remember.
NASIR: How can you ask me the question and test me if you know the answer. I thought it was going to be some trick answer like today’s date or something. Yeah, it feels like it’s almost been a year, I know that.
MATT: Now I feel bad.
Yeah, July 6th – that’s what I said, right? Or did I say 5th?
NASIR: That’s the date that it was published or the date that we recorded it?
MATT: Hmm. Good question.
NASIR: It’s an okay question. It’s not great but…
MATT: Not a good question – a good point. That was the day it went up so it’s possible that we recorded in June. Yeah, you could have been right.
NASIR: What should we do? Should we just refer to that episode and have everyone listen to it because it’s pretty much the same?
MATT: I meant to go back and listen to it to see what we had to say and I just didn’t do it.
NASIR: Yeah, ditto.
MATT: I don’t know what the number was at that time but I don’t think much has changed in-between when that first came out and what it is now.
NASIR: I think the dollar amount is different by, like, $3,000, right?
MATT: Yeah, because we were closer to 50 before, right?
MATT: Okay. You said this was going to affect a lot of people. I had a number of how many people it’s going to affect. It’s quite a few.
NASIR: Some say it’s up to 4.2 million. That’s what the DOL estimates.
MATT: We should probably explain what we’re talking about because we haven’t done that yet.
NASIR: Let’s just leave it in the dark. Okay, go ahead.
MATT: So, the dollar threshold for exempt employees. The way I think of it is this; the way an employee can be exempt is if it checks two different boxes – the first of which being the duties test – it’s one of a couple of different categories here. We have executive, administrative, professional, outside sales person and then some computer professionals as well.
NASIR: Or what we like to call computer geeks.
MATT: So, that’s checkbox one. I mean, there’s a lot of people that can fit into those categories – quite a few, actually. I think we’ve talked about those before so I don’t want to go back and explain all those different ones. That’s box one.
Box two is the salary amount. So, previously, it was what? 23,660? I’m just going off of memory. Yeah, 23,660. It got a substantial jump up to 47,476. So, what is that? Almost double.
NASIR: Yeah, just about doubled. What’s interesting on how they actually determined what the amount is and it’s actually kind of important because this formula or standard that they created is going to be used ongoing so this number – 47,476 – is actually going to be automatically updated every three years.
MATT: Three years, yeah.
NASIR: And so, the basis for that is basically they take the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region – which currently happens to be the south. And so, the idea is they take – just to kind of rephrase that a little bit – they take the lowest-wage region of the country – which happens to be the south – and then take the 40th percentile of that – meaning 40 percent of the people make less than that amount and 60 percent of the people make more than that amount. And so, that number is going to change every three years.
MATT: Yeah, I have to confess, I think this is the first math error I’ve made on the podcast. Episode 270 recorded down. I said less than double. It actually is more than double. I don’t know what I was thinking on that one.
NASIR: Oh, man, that’s embarrassing, actually. Wow. I don’t even know what to say.
NASIR: I feel bad for you.
MATT: Enough of the numbers. Enough of the math here. 47,476 – substantial jump up from what it used to be and this is federal, of course. In California, it’s double what the minimum wage is, I believe. 41,600, yeah.
NASIR: I think we talked about this last year, too. Even in California – which, by the way, not all states have a minimum wage for their exempt workers like California does but it’s a hard and fast rule in California – this minimum wage, so-called minimum wage is even beating out California right off the bat.
MATT: Yeah, for now. Of course, when the minimum wage is going to incrementally get bumped up.
NASIR: Oh, that’s true.
MATT: Well, depending on what the federal number gets changed to in three years for the salary limit, it’s possible that California might exceed it by that time. But, at least for now, yeah, this is higher than what California is which doesn’t happen too often.
NASIR: It looks like they might be chasing each other a little bit on that price.
So, here’s a deal. We’re calling it a minimum wage for exempt workers but remember this only really applies to you as employers if your workers are working overtime.
NASIR: Now, if they are working overtime, then this is definitely going to affect you. But there are ways to actually make some adjustments – some may be easier or harder than others – but we can talk a little bit about some of your options.
MATT: Yeah. I mean, the options, I’ve thought about this a little bit. I’ve thought through some different options and kind of what I think would make the most sense. So, let’s just go through some of them.
So, option one would just be if you have… The setup is always going to be the same – well, not always – you have someone who, in this case, makes under the threshold amount but they’re kind of close to it – or maybe they’re not that close. You know, option one would be you could give them a raise. Let’s say they’re making 45,000 a year, you can bump it up to that 47,476 and then they’ll be exempt at that time. That’s kind of option one. I think that makes the most sense.
NASIR: When it’s close, right?
MATT: Yeah, when they’re close, and I know we’ve had clients that have done that in the past.
NASIR: I would say a couple of caveats to that is, if that employee is not working overtime anyway, then it’s kind of a non-issue.
NASIR: Or if they are working overtime, then it’s just a math problem. But keep in mind that I wouldn’t structure your salary so that it is 47,476. I would give a little bit of wiggle room there. I haven’t looked into how they calculate that but it does seem like they look at a per week structure and what if mid-year you change and I’m sure that’s okay but I’m not familiar how they calculate it but bottom-line is I would give yourself a little wiggle room just in case.
MATT: Yeah, it’s not that clean calculation that California has which his just double minimum wage, 40 hours a week, 52 weeks a year.
MATT: That’s option one.
You made a very good point. If they’re not working overtime or have that possibility or danger of hitting overtime, you don’t need to do it. But, if they are, then different story. That’s one option that’s out there.
You know, a basic one that’s out there too is you just pay them overtime if it is someone who is going to get those overtime hours. As much as I said I didn’t want to talk about math, I think some of this does kind of boil down to a math problem of what’s going to make the most sense – at least from a numbers standpoint. If the overtime is not going to be much, if the amount of overtime they’re going to get is less than what their raise would be, then, yeah, maybe you just do keep them as is and pay them the overtime.
NASIR: Yeah, that’s an option for some but I’m sure, for a lot of people, they’re like, “Well, I prefer not to do that.”
MATT: Yeah. Another obvious option too is just to have them work less hours if they are working overtime or just make sure that they’re not working more than 40 hours a week, 8 hours a day.
NASIR: Yeah, and that’s very simple. You just restrict. You could even tell part of the employment manual or your employee agreement that you are not to work more than 8 hours – well, in California – more than 8 hours a day or more than 40 hours a week. If it’s on a federal standard, just more than 40 hours a week.
The only problem with that is that, as far as the law is concerned, even if they’re not supposed to but somehow they get 42 hours in and they’re still entitled to that overtime. Now, they can be subject to discipline because maybe they overworked or what-have-you or logged too many hours, but that’s a separate issue. Just keep that in mind as well.
MATT: Yeah, definitely. Along those lines too, another option would just be to – of course, if it makes sense – for the position, just hire another person to supplement those hours.
NASIR: Yeah, part-time.
MATT: Yeah, I mean, it would make more sense if you have someone that’s not a little bit over 40 but we’re talking maybe 60 hours a week. Well, that’s probably too much. I don’t know – like, 50? Like I said, this is all a math problem. Just plug this in Excel and figure it all out. That’s another option.
NASIR: I would just hire, if you have something for 40 hours a week, you just hire 40 employees and have each employee work one hour – guaranteed to be under the overtime equivalent.
MATT: Yeah, because the cost of the HR for taking care of all those people is not going to outweigh that.
NASIR: I’m not saying it’s a good option. I’m just saying it’s an option.
MATT: So, let’s get to some of the more peculiar options. I mean, I’ve seen people talk about this. I don’t know. I can see how it’d work but I have a problem with it and that’s converting – or whatever word you want to use – an employee from non-exempt to exempt.
NASIR: Oh, you mean the opposite, right? You have the new rule basically converting from they were exempt but now you’re converting them to a non-exempt employee, right? I’m sure you’re thinking about the situation where you’re converting them to a non-exempt employee but, instead of paying them overtime or you still pay them overtime but you make the economics work so that what you do is you lower their base salary and then you basically estimate how many overtime hours they’re going to work on a regular basis and then you end up paying them the same amount. It kind of sucks for the employee but that could be a solution as well.
MATT: Yeah, okay, I think that’s what I was thinking. You explained it better than me.
NASIR: It’s tough, right? I mean, first of all, any time you’re doing a conversion from an exempt to a non-exempt, even with the new law changes, it still may raise some red flags in the sense that, you know, some employees will look into, “Well, was I classified as an exempt correctly before?” because, keep in mind, even if they met the threshold of the old minimum wage, they still had to meet the duties test which we went over – to actually have exempt duties. And so, if you didn’t have that, there could be some potential risk and liability just by this law coming about. That was one of my main concerns when it came out – for our clients and future clients. This is such a big piece of news that anyone – think about it – anyone who’s making less than that threshold is likely going to hear about this and they’re going to become more aware. It’s not to say I don’t mind employees being more educated but, if an employer does make mistakes with how they classify their employees, this could be a vulnerability.
MATT: No doubt. Obviously, a lot of the attention in this classification is in terms of employees and independent contractors but this will certainly play a big part over the next few years of another form of misclassification and, just by the sheer number of employees this is going to affect, it’s going to affect employers as well.
NASIR: Yeah, and we’ve talked about it in the past. The most common mistake that employers make regarding classification for exempt versus non-exempt is they’ll say, “Oh, they’re exempt because they’re paid salary.”
NASIR: Of course, it’s possible to be non-exempt and paid salary. The test is not whether you’re paid salary. As you just heard, it’s how much you make and what are your duties, right? And so, that’s something to look out for. Pretty common, I would say. It’s not uncommon.
MATT: Yeah. I mean, you’re exactly right in both those comments. I think that’s the mistake employers make but, yeah, it’s still not as big of an issue as the employee versus independent contractor misclassification.
NASIR: Yeah. Again, even though this says it’s going to affect a lot of people, it kind of makes sense that, in order for this to occur, you have to have employees that work overtime which, even in this day and age, it’s not actually common in there’s a regular work week and that typical employers stick to that schedule. And so, even though you may have made a mistake on classifying your employees, hopefully, again, it’s a non-issue because your employees are working 40 hours or less anyway. It gets tricky if you made that same mistake of classifying them as exempt because their salary, you probably don’t keep track of their hours and the employee probably doesn’t either. And so, it becomes an issue later. It’s like, “Hey, wait a minute, I know I came in on a Saturday – at least a couple of times or once a month or so,” and so they can always look back and raise that as an issue.
MATT: Yeah, I think that’s really the thing to remember here.
The focus has been on, “Oh, it’s people. It’s employees that are within this salary range that are going to be affected,” but what you just said about it only affects them if they’re actually going to work overtime – or they are – I mean, that’s the big difference.
NASIR: Very good. I mean, this is pretty huge news. I know we talked about this coming out. At the same time this was going on last year when he announced this – President Obama – it was at the same time he was announcing all these other changes, including his immigration plans and so forth and making a lot of executive orders and this was done through an executive order. I know, in the past, his executive orders have been challenged. But, traditionally, the Department of Labor has had the authority to determine what type of workers are exempt to overtime requirements. And so, I don’t think, if anyone’s hoping for some kind of legal challenge, it’s very unlikely and this will probably go through not only now but most likely – depending on who the president’s going to be – it’s probably going to continue as well. I’d be surprised if this is changed.
MATT: Yeah, did you watch the two-minute video that they put out about how this works? On the White House site?
MATT: It’s like one of those cartoon, animated infographic things, videos, you know what I’m talking about.
NASIR: Has it become viral?
MATT: No. When I was looking at the actual specifics of it, there was a video that kind of led everything. I thought that was kind of funny.
NASIR: Well, if you link it, then I’ll look at it. Otherwise, you have to put it on our podcast.
MATT: I did link it.
NASIR: Oh, you did?
NASIR: Oh, yeah. I saw that letter. I saw the letter. It was a video? Oh, yeah. Well, let’s play it here! We’ll link it to our website. Okay, there’s a little animation.
MATT: Yeah, I’ll link it in the notes. I just didn’t know if you saw it or not. I don’t really have anything to say about it. I just thought that it was funny how they put that up there.
NASIR: This actually looks pretty fancy.
MATT: Well, I mean, it is the US government so hopefully they have somebody that can do this stuff.
The whole thing’s kind of a takeaway for employers, I suppose. You know, this probably will affect a lot of – what percent of businesses do you think this… well, I guess it’s going to affect 100 percent of businesses because it trickles down and stuff. You see what I’m saying in terms of it’s going to affect one business and they’re going to do something, changing their prices, and it’s going to affect things from the vendor like that. But in terms of actual individual businesses with their employees, I wonder what percent this actually is going to affect.
NASIR: Yeah, it’s a good question. I honestly think that it may actually have a positive effect because, in a sense, from an employment market, in the options that we went over, the easiest option, especially when you’re working with workers in that wage range that work overtime, I’m just thinking about the different types of industries – like retail and so forth – it may just be easier to just hire another. Like, if you have a sales manager, for example, on a retail store, they make less than that but you’ve classified them as exempt because they’re a manager, it’s probably just easier to hire another manager and have them work part-time to cover those overtime hours rather than pay overtime. That actually may have a net benefit for the economy if you think about it that way.
I mean, everyone has their own opinion and I’m sure there’s studies of what’s going to happen but let’s just revisit it and see, you know, next year, what the impact has been.
MATT: Yeah, we had December 1st like you said when this is going to go into effect.
NASIR: Yeah. So, we may have to wait a little bit.
MATT: Kind of weird. You would think that they would just choose January 1st but I guess not.
NASIR: They make everything more difficult, unfortunately.
MATT: But, yeah, I think, I’m sure we’ll talk about this at some point next year and just see where things are at.
NASIR: Very good.
All right, thanks for joining us!
MATT: Yeah, keep it sound and keep it smart.