As most employers now know, the U.S. Department of Labor will be raising the salary thresholds that apply to most of the “white-collar” overtime exemptions effective January 1.

The higher thresholds will apply primarily to employees who would qualify under the executive, administrative, and professional exemptions to the overtime rules under the Fair Labor Standards Act. The threshold for these exemptions will increase from its current $23,660 a year, or $455 a week, to $35,568 a year, or $684 a week.

Employers may count non-discretionary bonuses, incentives, and commissions toward up to 10 percent of the standard salary level required as long as the employer pays those amounts at least annually.

In addition to meeting the salary threshold, the exempt worker must satisfy certain job duties criteria depending on the type of exemption sought. The “duties” requirements will not be changing as a result of the regulatory changes being made by the DOL.

The higher salary threshold is expected to have a significant impact on retail employers, many of whose managers and assistant managers may currently qualify under the executive exemption but may not satisfy the new salary thresholds set to take effect January 1.

Exemption basics

Generally, to qualify for exemption from overtime under the FLSA, the employee (1) has to be paid on a salaried basis (not hourly), and (2) must earn the “threshold” amount or more, and (3) must perform certain specified job duties depending on the type of exemption sought.

In the retail context, an employee will meet the “duties test” for the executive exemption if he or she meets the following requirements:

  • The primary duty is managing the enterprise, or a customarily recognized department or subdivision of the enterprise (including a store or restaurant),
  • The employee “regularly and customarily” supervises two or more full-time employees (or their equivalents), and
  • The employee has the authority to hire and fire employees (or the employee’s recommendations on hiring, firing, promotion, or advancement carry significant weight).

Most retail managers and assistant managers are salaried, and many meet these duties requirements, but they may not be paid enough to meet or exceed the new salary threshold that will take effect on January 1. If an employee does not meet all three requirements (salary basis, salary minimum, and duties), then the employee will not be FLSA-exempt and will be entitled to overtime for any hours worked in excess of 40 per week. This can be significant for an employer in the retail industry, where managers and assistant managers frequently work more than 40 hours a week.

Recommendations for retailers

What should retail employers do so that they are ready for January 1?

As a first step, it is a good idea to make sure that your managers and assistant managers meet the “duties” test for the executive exemption. Although the current duties tests will stay the same, it is not unheard of for employers to misclassify employees as “exempt” when they really should be non-exempt based on their job responsibilities.

Assuming the managers meet the duties test for the executive exemption, identify the managers whose salaries are below the new threshold.

With any managers whose salaries are too low, decide whether to increase their salaries to get them above the new threshold or to reclassify them to non-exempt. If you choose the latter, you may want to consider limiting their hours of work to reduce or eliminate overtime.

Finally, keep in mind that regulations issued in May 2016 under the Obama Administration (but which were invalidated by a court ruling) would have raised the salary thresholds even more. So if you already went through the above steps in 2016, then you may not have too much of an adjustment this time.