Once again, the Department of Labor has changed the rules surrounding employees that are considered “exempt.” The word “exempt,” in common explanation means “does not have to clock in” or “salaried.” In other words, the employees’ hours are not strictly recorded.
The new changes won’t have as big of an impact as the last set of changes, but they are something that every small business owner needs to be aware of when it comes to the impact on their operations.
And let me get this one out of the way: California is currently exempt from the ruling simply because its standards are already higher than federal.
Let’s go over the basics of the rule of exemption before we talk about the recent changes.
In order to be exempt, the “duties test” and the “pay test” both have to be met. If an employee only qualifies by one standard and not the other, the business will be held to whatever penalties the government deems appropriate.
The “duties test” is largely about independent decision making. Can the employee hire and fire people at their sole discretion? Can they spend budgeted money on long-term planning like marketing and promotions? How many people report to them?
In general, small businesses in the tire and automotive aftermarket can sometimes have one person who is salaried working in a store and making decisions. In a situation like this, if the owner works in the store on a regular basis, then the store manager cannot be salaried — nor can anyone else. If the owner’s hours are irregular and are largely hands-off to daily decision making, then the store would be permitted to have a salaried employee, but the employee still must be able to pass the duties part of the rule.
The ”pay test” is fairly straightforward. An exempt employee must be paid in a way where their pay doesn’t fluctuate weekly due to performance or hours worked and they must meet a threshold set forth by the government on minimum pay. That is the part that changed this year, effective July 1, and will be subject to automatic changes next year and periodically in the future.
The exemption status begins with classification of one of the following: executive, administrative, professional, computer, highly compensated and outside sales. You can toss outside sales, computer and highly compensated since outside sales requires a majority of travel, computer, since it’s a specialty, and highly compensated salaries start at $107,432 base — and changing to $151,164 by 2025 — and California doesn’t apply here.
The other three designations will require a minimum weekly pay of $844/week or $43,888 annually. Clearly, this amount is typically lower than any store manager would make as a base, but remember that the salary test is dependent on the duties test. If your employee doesn’t clear the duties test, then their hours worked will be subject to overtime rules. And if you didn’t record their hours worked, the government will take the employees’ word for it. If they say they usually work 60 hours a week, then that’s enough for the government.
In the beginning of January 2025, this salary threshold will increase to $1,128/week ($58,656 annually) and starting in July 2027, will be automatically increased and set on a three-year increase schedule based on earnings data.
What does this mean for you, the independent tire store owner? Well, that depends. The likelihood of you being targeted by the Department of Labor for your one employee is astronomically low. That number dramatically ticks up, though, if a large corporation in your state or local area and in your same industry gets audited and loses.
Your chances also dramatically increase if any current or former employee complains about the violation to the Department of Labor’s Wage and Hour Division. It doesn’t matter if they are an angry employee seeking revenge. Either there’s a violation or there’s not. And retaliatory penalties are much harsher. So if an employee has a complaint and they talk to you first, focus on what’s the law.
The bottom line? If you are currently in violation of this new change to an old law, make the adjustments. Work the math backwards from what employees earn now as a salary to what they earn working the same hours, including the portion of overtime. When their hours go over, you pay more. Just make a correction the following week to keep it consistent. Remember, this is only a big deal if you’re in violation.
One final note: please remember that hourly employees’ bonuses are subject to overtime rules, as well. If you have a bonus plan of sell x and get set $x in return and the employee had to endure overtime to achieve that, there is a premium established by the government that adds on a little more than your said payout.
