Overtime

Article Dean Dorton

By: Jen Shah, Dean Dorton Equine Industry Team Leader

As the December 1, 2016 implementation deadline rapidly approaches, we thought it would be useful to farms to provide some reminders on these new regulations and to illustrate their effect on certain farm managerial, executive, administrative and professional positions. Farms, professionals (myself included!) and even local Department of Labor agents have been confused about interpreting the new rules and applying them to farms.

Earlier this year, we issued an article regarding the potential applicability to farms under the final regulations issued by the US Department of Labor to Part 541, which governs certain executive, administrative and professional positions under the Fair Labor Standards Act (FLSA). A link to that article may be found here:

Federal Overtime Regulations for Thoroughbred Businesses

This article takes a closer look at how the updated Part 541 regulations may impact farms, specifically regarding certain manager-level, executive, administrative or professional farm employees who fall below the new $47,476 salary threshold.

FLSA provides for two categories of employees:

  1. Exempt – Salaried
  2. Non-Exempt – Hourly or Salaried

“Exempt” in this context means “exempt from overtime pay.” In order to be “exempt,” an employee must meet the salary basis test (fixed salary not subject to reduction based on the quality or quantity of work performed), the duties test (refer to our prior article for a more in-depth discussion), AND the salary level test. If any one of these tests is not met, then an employee is “non-exempt.” A non-exempt employee must be paid based on hours worked in the pay period plus overtime at a rate of time and one-half for hours that exceed 40/week. The prior statement ignores the general agricultural exemption under Part 780, which is specifically addressed later in this article.

The salary basis and duties tests did not change upon issuance of the final regulations, but the minimum salary level was increased to $913 per week ($47,476 per year) from $455 per week ($23,660 per year). Therefore, if a person meets the duties test but is paid less than the minimum salary threshold, this employee is treated as “non-exempt” effective December 1, 2016.

By converting a prior exempt-salaried employee to a non-exempt employee, the farm is now required to track actual hours the employee works and to pay at the calculated hourly rate based on these actual hours. This creates issues for both the farm and these farm employees.

So how does the above change from “exempt” to “non-exempt” status interact with the agricultural exemption under Part 780, which is available to qualifying employees who perform duties on the farm? As a reminder, the agricultural exemption was not changed by the updated regulations. Under Part 780, employees who are engaged in agriculture continue to be exempt from overtime pay at time and one-half (although KY law requires overtime to be paid to employees who have worked seven days in any given work week for all hours worked on the seventh day).

The updated regulations merely convert certain previously “exempt” employees to “non-exempt” status, requiring that these employees now be paid based on actual hours worked versus a salary. However, the hours worked in excess of 40 hours/week are only required to be paid based on the calculated hourly rate, not time and one-half, under the agricultural exemption available to qualifying employees under Part 780.

Let’s walk through an example of a broodmare manager who makes $40,000 per year, is paid weekly and works an average of 45 hours per week. Under Part 541, the manager meets the duties test of an executive and, as of November 2016, his salary exceeds the $23,660/year threshold. He currently is treated as an exempt-salaried employee and paid about $760/week ($40,000 per year/52 weeks).

Effective December 1, 2016, the manager does not meet the salary test since his $40,000 salary is less than the newly-established minimum of $47,476. Therefore, this broodmare manager is converted from an exempt-salaried employee to a non-exempt employee.

What does the change in status on December 1, 2016 mean for the farm and the broodmare manager? The farm may address this situation in a variety of ways:

  1. Increase the broodmare manager’s salary to the $47,476 threshold.
    1. Pro – Less administrative burden because tracking hours is not required.
    2. Con – Increased expense for the farm.
  1. Convert to an hourly wage using a 40 hour/work week.
    1. The broodmare manager’s $40,000 salary could be converted to an hourly wage, and the manager would be paid by the farm for the actual hours worked in a week. Conversion to an hourly wage per hour is calculated below for this example:
    2. Salary ($40,000) / (40 hours per week * 52 weeks) = $40,000/2,080 hours = about $19/hour.
    3. Therefore, if the broodmare manager works a 40 hour week, he would be paid about $760 ($19/hour * 40) for that week. If he works 60 hours in one week, he would be paid about $1,140 ($19/hour * 60) for that week.
    4. Pro – Keeps base weekly wage the same for the broodmare manager (with increased pay for weeks where greater than 40 hours are worked).
    5. Con – Increased salary expense for the farm and increased administrative burden for both the manager and the farm to track hours.
  1. Convert to an hourly wage using the average number of hours worked/work week.
    1. The broodmare manager’s $40,000 salary could be converted to an hourly wage, and the manager would be paid by the farm for the actual hours worked in a week. Conversion to an hourly wage per hour is calculated below for this example:
    2. Salary ($40,000) / (45 hours per week * 52 weeks) = $40,000/2,340 hours = about $17/hour
    3. Therefore, if the broodmare manager works a 40 hour week, the pay would be $680 ($17/hour * 40) for that week. If he works 60 hours in one week, he should be paid about $1,020 ($17/hour * 60) for that week.
    4. Pro – Attempts to maintain current salary expense consistent for farm.
    5. Con – Broodmare manager will receive less weekly pay in weeks where 40 hours are worked versus what he received previously (farm may consider a bonus to “true-up” the manager’s salary at intervals throughout the year). Increased administrative burden for both the manager and the farm to track hours.

In short, if you are converting a managerial, executive, administrative or professional farm employee from “exempt” to “non-exempt” status, you are required to pay for actual hours worked in a work week, but are not required to pay at time and one-half rates for hours in excess of 40 as long as the employee qualifies for the general agricultural exemption under Part 780.

Note that a ruling regarding a preliminary injunction to implement these FLSA updates is expected to be issued on November 22, 2016 by a U.S. District Court. Another hearing trial could be set for November 28th if the motion is denied. Stay tuned for news on this ruling; however, in the meantime, it is wise to prepare the farm for the December 1, 2016 implementation of these updated regulations.

Please contact me at jshah@deandortonstg.wpenginepowered.com or your Dean Dorton advisor with any questions regarding the above.

Jen Shah, Equine Industry Team Leader

Article Dean Dorton

The U.S. Department of Labor recently released its final regulations, issuing changes to Part 541, which govern certain overtime exemptions under the Fair Labor Standards Act (FLSA) for executive, administrative, professional, computer, and outside sales employees.

Under current law, certain executive, administrative, and professional employees are exempt from overtime pay if their salary is at least $455 per week ($23,660 per year) and other criteria are met regarding job roles and responsibilities. In addition to the salary requirement noted above, the respective duties for executive and administrative positions are:

  • Executive: Employee’s primary duty must be managing the enterprise (or a department of the enterprise), must regularly direct the work of at least two other full-time employees, and must have the authority to hire or fire employees.
  • Administrative: Employee’s primary duty must be the performance of office or other non-manual work related to management or general business of the employer and includes the exercise of discretion and independent judgment.

Effective December 1, 2016, the exemption from overtime pay for the above positions addressed in Part 541 is applicable if the employee’s salary is at least $913 per week ($47,476 per year). This amount is based on the 40th percentile of the lowest income region of the country, currently the South. Up to 10% of this salary threshold may include certain bonus or incentive payments (including commissions) that are paid at least quarterly.

This salary level will increase automatically every three years to match national wage growth. Note that the final regulations did not make any changes to the duties tests that partially determine whether a position qualifies for an overtime exemption under Part 541.

Personnel in the equine industry who meet these criteria governed by Part 541 may include trainers who train at the racetrack and back office support staff who work with racing or training operations.

Agricultural Exemption
It is important to note that the final regulations did not include any changes to the agricultural exemption addressed in Part 780. Under Part 780, employees who are engaged in agriculture are exempt from overtime pay*. For this purpose, employees engaged in the breeding, raising, and training of horses on farms are considered agricultural employees. Qualifying farm employees may include grooms, foremen, stallion managers, trainers, watchmen, and others directly involved with the care of horses on the farm. In addition to those directly involved with the care of horses, positions that are incidental to or in conjunction with the qualifying farming activities are also treated as agricultural employees. Financial staff, booking secretaries, office support and general maintenance positions that support farm operations qualify.

A significant exclusion from the agricultural designation applies to activities performed by an employee off the farm in connection with racing. A training track at the racetrack is considered off the farm. Special care should be given to track employees’ hours, if significant time is spent off the farm in this capacity.

In summary, since most personnel employed on a thoroughbred horse farm will fall under the agricultural exemption as addressed in Part 780, the newly finalized regulations may have little effect for farms. However, horse racing and training ventures that operate primarily off the farm should consider the impact of these new rules.

* Kentucky law requires overtime be paid to employees who have worked seven days in any given work week for all hours worked on the seventh day.

Contact your Dean Dorton advisor or Jen Shah at jshah@deandortonstg.wpenginepowered.com for more information.

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Article Dean Dorton

The U.S. Department of Labor (DOL) recently announced a significant proposed change to the wage and hour rules under the Fair Labor Standards Act.

Background
The current rules generally require employers to pay an employee one and one-half times an employee’s regular pay rate for hours worked over 40 in a work week. However, the rules exempt certain “white collar” employees from the overtime pay requirement.

To fit within this exemption, each of these tests must be met:

  1. “Salary basis test” – The employee must be paid a fixed salary that is not subject to reduction due to variations in the quality or quantity of work performed.
  2. “Salary level test” – The employee’s salary must exceed $455 per week ($23,660 annually).
  3. “Duties test” – The employee’s primary job duties must involve executive, administrative, or professional duties.

Proposed Change
The DOL proposes changing the “salary level test,” increasing the threshold from $23,660 to $50,440 (with a provision for future annual adjustments). The DOL has characterized the salary level test as being the “best single test” of exempt status. Information from the Department of Labor can be found at  https://www.dol.gov/whd/overtime/NPRM2015/.

Impact
Based on 2013 data, the DOL estimates that this change may impact over 20 million workers, about 15% of all U.S. workers. As we understand, no effective date has been established for finalizing the proposed rule changes. A short period for submitting comments from interested parties on the proposed changes closes on September 4, 2015.  Many businesses, industry associations, and other organizations have identified major impacts from the proposed rules, if finalized. Here are just a few such impacts:

  • Employers will be required to reassess exempt status for employees in salaried positions earning less than $50,440 and to strategize about how to address these employees’ situations.
  • Employers may need to revise labor cost budgets and the pricing of their products and services to find the dollars needed for additional overtime pay or adjustments in annual salaried compensation.
  • Employers will need to consider all staffing options to determine the most cost effective manner in which to operate and alleviate the added overtime pay burden.
    • This may include a staffing model favoring more part-time staff.
    • Employers may explore ways to reduce headcount.
    • Employers will need to assess pay practices for seasonal workers and flex-time working arrangements.
  • Employers may need to create new systems and policies to govern the approval and control of overtime work.
  • Employers may need to upgrade or implement technology (software and hardware) to manage the entirety of the payroll process.

For further information, questions, or guidance, please contact Jim Green, Director of Accounting & Financial Outsourcing, at jgreen@deandortonstg.wpenginepowered.com or (859) 425-7615.

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