Understanding the New Overtime Pay Rule

Hopefully you’ve perused the U.S. Department of Labor (DOL)’s final rule updating overtime regulations under the Fair Labor Standards Act (FLSA), which will impact four million workers — including some dealership personnel — when it goes live on Dec. 1, 2016. And hopefully you’re planning to audit your payroll and pay practice as part of your strategy for compliance.

Communication with your employees will be critical, as the new rules will make employees who make less than $47,476 ($913 per week) eligible for overtime pay. I write “critical” because many employees view the new rules as a huge win. They believe they will now be eligible for — and will get paid — overtime. But let me explain why they might be disappointed come Dec. 1.

Let me start with this: Many people wrongly believe employees who get a fixed salary do not get paid overtime. Under the FLSA, unless you meet special “white collar” exemption criteria, you must be paid overtime at a rate of 1.5 times your regular rate of pay. But in order to qualify for that exemption, employees must meet salary requirements, and their primary job duties must consist of executive, administrative, or professional duties as defined by the DOL. And you are still eligible if you meet one set of criteria and not the other. I recommend you check the Labor Department’s FLSA website for additional details on what job duties meet these overtime exemptions.

Now, the new rules more than double the salary threshold for overtime eligibility from $23,600 per year ($455 per week) to $47,476 annually ($913 per week). And this threshold will be updated every three years to account for inflation.

The good news for dealerships is employers can use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level. That means an employee who makes a salary of $45,000 and commissions of $4,000 will meet the threshold and be exempt.

Let’s walk through an example: Bob is a used-car manager who makes $40,000 per year in base salary ($769.23 per week). He also averages an additional $40,000 in sales commissions. Bob usually works 50 hours per week (40 regular hours plus 10 overtime hours). Now let’s look at the dealership’s options to satisfy the new rules:

1. Increase Bob’s salary to meet the new minimum threshold and maintain his overtime exemption status: As long as Bob earns 90% of the minimum threshold in base salary (equivalent to $42,728.40 per year, or $821.70 per week), sales commissions can cover the remaining 10%. Total increased cost for your dealership would be $52.47 per week or $2,728.44 per year.
2. Convert Bob to an hourly, non-exempt employee and pay him overtime at 1.5 times his regular rate of pay: Here’s where this option can get confusing: Bob’s regular rate of pay will vary week by week based on commissions, as his regular rate includes an average of all base pay plus commissions for the week. If you pay him an hourly rate of $20, and he earns commissions of $800, his regular rate for the week is $20 x 50 hours = $1,000 + $800 commissions = $1,800/50 hours = $36/hr. Now multiply the latter by 1.5 and his overtime rate is $54. Total increased cost under the new rule is $540 per week.
3. Convert Bob to an hourly, non-exempt employee at a rate equivalent to his current annual salary and prohibit Bob from working any overtime: Total increased cost under the new rules is zero.
4. Convert Bob to an hourly, non-exempt employee and reduce his hourly rate to a level where his total weekly pay, including anticipated overtime, is equivalent to his current salary level plus commissions: Total increased cost under the new rules is zero.

Unfortunately, all options pose a potential issue in employee relations, as no one likes to see their hours and/or pay cut. And employees who are converted from salaried to hourly, non-exempt pay plans will probably feel like they’re losing their freedom and privileges when they are forced to punch a time clock for the first time in their career. That’s why, like I previously wrote, communication will be key.

So, again, audit your payroll today. Find out which employees will be eligible for overtime under the new rules. Run overtime calculations and, depending on the culture, values, and business goals of your dealership, select the best option that will keep you compliant. 

Dave Druzynski is the human resources director at Auto/Mate Dealership Systems. Email him at [email protected].