New Rules for Paying Employees on a Salary – Tough Decisions & Difficult Conversations

By: Randall Sutton

Saalfeld Griggs Employment Law & Litigation Practice Group

Oregon Business Lawyers


It’s finally here. Nearly a year after the proposed rule was announced, the U.S. Department of Labor (“DOL”) has raised the salary threshold for employees to qualify as “exempt” under the Fair Labor Standards Act (“FLSA”).  The new rule will require most Oregon employers to choose whether to increase salaries, begin paying overtime, struggle with decisions about increasing salaries, paying overtime, and tracking hours, salary obligations or paying more overtime, while trying to balance the potential negative affect to employee morale and workplace flexibility.


The New Salary Threshold

Under the new rule, an employee cannot be exempt from minimum wage or overtime unless the employee makes the equivalent of at least $47,476 per year ($913 per week). The new rule more than doubles the former threshold of $23,660 per year ($455 per week).   Employers can use nondiscretionary commissions, bonuses, and other incentive payments to satisfy up to 10% of the salary threshold, so long as these incentives are paid at least quarterly. The threshold of $913 per week will be automatically updated every three (3) years to keep the salary level at the 40th percentile of full-time salaried workers in the lowest Census region (the South).  This automatic update will not allow the government discretion to account for changing economic conditions or provide the opportunity for public comment on setting new thresholds going forward.


The law also raises the cap on payment of overtime to highly compensated employees to $134,004. Unfortunately, state overtime laws here in Oregon do not provide a similar exception.


Effective Date

The new rule goes into effect on December 1, 2016. According to the DOL, over four million workers currently classified as exempt will become eligible for overtime.Future automatic updates to the threshold levels will occur every three years, beginning on January 1, 2020.


No Change to Duties Tests

It comes as little consolation for many employers that the DOL did not tighten up the existing duties test for working supervisors.  Many feared that the DOL would make it more difficult to qualify as a supervisor under the new regulations, but the DOL decided that raising the salary threshold is sufficient to weed out borderline cases where the employee is more of a worker than a supervisor.


What it Means to be “Exempt”

To be exempt from wage and hour laws requiring the payment of overtime, an employee must perform non-routine duties that require the exercise of discretion and independent judgment.  This requirement continues under the new rule. The employee must also be paid on a “salary basis.”  The fixed salary must be paid during any week in which the employee performs work, unless certain narrow exceptions apply.  In general, the exempt employee’s paycheck must look the same from week to week, even if the employee leaves work early or takes a little time off.


In addition to the duties test and the requirement to pay a fixed salary, the salary itself must be large enough to satisfy the law. Employees paid below the threshold will not qualify as exempt and must be paid overtime. This has not been a problem in the past, as the threshold was set only a few dollars higher than minimum wage here in Oregon. By more than doubling the threshold, the new rule will require payment of overtime to many supervisors, mid-level managers and others.


Tough Decisions & Difficult Conversations

For companies that currently have salaried exempt employees that are paid less than the salary threshold, the new rule means that you will either need to: a) bump the salary past the threshold; b) switch the employee to hourly compensation and pay overtime; c) continue to pay a salary, but track hours and pay overtime; or d) spread the work around to keep the employee’s hours below the 40 hour per week overtime threshold.


Switching an exempt employee to hourly is problematic in a number of ways:

  • Employees see being paid on a salary as a matter of prestige and status within the company. The employee no longer punches the clock and is trusted by the company to get the job done by working whatever hours may be necessary.  Tracking time is also a hassle that salaried employees often don’t bother with. Employees switched to hourly status may feel that they have been demoted.
  • Has the employee gotten used to a flexible schedule, working many hours some weeks, but dialing it back during others? With hourly compensation, that flexibility comes with obligations to pay overtime during busy weeks, and dock the employee’s pay when working only a partial week.
  • An employee who has gotten used to working on a salary basis may have difficulty adjusting to a schedule that does not allow for overtime. You will need to evaluate whether to force the employee to work less, allow overtime but pay the employee more, or to adjust the employee’s hourly rate to reflect the anticipated amount of overtime the employee will need to accomplish the job.
  • If you prohibit overtime, how will the employee feel about working a shorter schedule? Is this an employee who likes to come in early and stay late?  Are there work-related meetings that typically occur after hours?  As a practical matter, will the status and professional opportunities of the employee actually diminish with the new hourly compensation method?


Paying a Non-Exempt Employee on a Salary

It is not unlawful to pay a non-exempt employee on a salary basis.  However, this solution is rarely satisfying to the employer, as the employer must still track hours worked, and must still pay overtime for hours worked over 40 in a single week.  Moreover, the calculation of the overtime rate is much more complicated using this method, and the overtime rate may vary from week to week. Employers wishing to go this route should agree with the employee in writing regarding the number of hours per week the salary is intended to cover. Such an agreement is key to comply with the law and makes calculating overtime easier. If the employee works fluctuating hours each week, you can agree with the employee in advance that the salary is intended to cover all hours worked, with the overtime calculation fluctuating from week to week.


Next Steps:

Wage and hour laws are complex and little mistakes can have major consequences. Get legal advice to ensure your practices are compliant.  To prepare for the new rule, we recommend that you:

  • Evaluate which positions are affected by the new rule.
  • In close cases, decide whether you can (or want to) bump salaries above the new threshold.
  • Consider whether duties can be distributed to avoid unnecessary overtime.
  • If you wish to continue paying a lower paid employee on a salary basis, start tracking hours and reach an agreement on the standard work week and how overtime will be calculated.
  • Consider the payment of non-discretionary bonuses to provide incentives that fill in the gap between existing salaries and the new minimum salary threshold.

We anticipate a large volume of new wage and hour litigation once the new rule takes effect.  Plaintiff attorneys take advantage of the complexity of the new law, statutory penalties for minor errors, and the degree to which small underpayments can add up company wide. We assist employers in auditing their wage and hour practices, and defend employers in wage and hour and other employment litigation.

The information in this article is not intended to provide legal advice. For professional consultation, please contact Randall Sutton or any member of the Saalfeld Griggs employment law team.