As discussed in a prior post, the Department of Labor’s new overtime regulations increase the weekly minimum salary threshold an employee must be paid to maintain exempt status under the FLSA’s “white collar” exemptions. The Final Rule, which becomes effective December 1, 2016, could affect up to 4.2 million employees according to DOL estimates. But an employer hoping to classify its employees as exempt need not meet the new threshold entirely through base salary. Instead, the new regulations allow employers to use bonuses, commissions, and incentive payments to satisfy up to 10% of the minimum salary threshold.
Under the regulations, bonuses, commissions, and incentive payments are includable as salary only if:
- The payment is non-discretionary; and
- The payment is made on a quarterly (or more frequent) basis.
Although the Final Rule does not define the term non-discretionary, the DOL generally considers an incentive payment non-discretionary when it is based on objective criteria communicated to an employee prior to the beginning of a pay period.
The DOL also included in its Final Rule a new “catch-up” provision for employers planning to use incentive payments to meet the minimum salary threshold. At the end of each quarter (or 13-week period), employers can determine exempt status by calculating each employee’s total quarterly salary, including base pay and any bonuses, commissions, and incentive payments. In order for an employee to qualify as exempt, the employee’s total quarterly salary must be more than $11,869—which is 13 times the minimum weekly salary threshold of $913. However, if the employee’s total pay falls short due to the employee’s failure to qualify for non-discretionary incentive payments, the employer can pay the employee a catch-up payment to meet the minimum total salary threshold.
Employers who anticipate taking advantage of the catch-up provision should be mindful of the following:
- Catch-up payments cannot satisfy a deficiency in base salary. Exempt employees must earn at least 90% of the minimum salary threshold in base salary each week to qualify as exempt.
- Catch-up payments are discretionary. If an employer determines that it is more cost-effective to pay an employee overtime for the quarter in which there was a deficiency, it can opt to pay the employee for any overtime hours worked instead of making a catch-up payment. Of course, this would require the employer to track the hours of the employee before knowing whether the employee will meet the salary threshold.
- Catch-up payments must occur within the first pay period immediately following the quarter in which there was a deficiency. If an employer does not make a required catch-up payment, then the employee is eligible for all overtime hours worked during the quarter in which the deficiency occurred. Employers hoping to meet the minimum salary threshold through incentive payments should ensure that their payroll systems will flag any deficiencies before the deadline to make the catch-up payment.
- Catch-up payments may create a disincentive for savvy employees whose exempt status depends on earning a bonus. Employees earning 90% of the minimum salary threshold via base salary may realize that they will not qualify as exempt unless their employer pays the additional 10% via incentive payments or a catch-up payment. If employees know that their employer wants to classify them as exempt, and they do not stand to earn much more in incentive payments than what they would earn through a catch-up payment, they may lose motivation to “earn” and work toward bonuses. If an employer chooses to not track the hours of employees who could receive a catch up payment to meet the salary threshold, the employer must pay the catch up payment. Otherwise, the employer would be at risk of having to fight an FLSA lawsuit, and could be liable for the employee’s unpaid overtime damages, as well as other damages under the FLSA.