New OT Rules and Its Effects on Sales Commissions

In case you haven't heard, December 1, 2016 will bring about new changes to the current overtime regulations. The Federal Department of Labor (DOL) has issued a new ruling that affects businesses both large and small. Here’s what you should know to help your company be prepared and compliant.

Simplification of the Rules

Right now, many businesses have difficulties understanding the rules of how to determine which employees are exempt vs nonexempt from overtime pay. The upcoming changes are intended to make the laws a bit easier to decipher, and more transparent for both companies and their staff members. While most of the updates are minimal, there are some that will have a significant impact on millions of workers nationwide.

New Overtime Earnings Threshold

One of the biggest changes to look for in December is the update to the federal overtime earnings threshold. For hourly workers, this number will more than double, from just over $23K, to over $46K. What this means is that any employee working 40 hours and earning less than the $46K threshold is eligible for overtime pay, which is currently 1.5 times their current earnings per hour. 

According to the Department of Labor, this represents a little over 4 million workers who were previously disqualified under the old law, and marks a new salary increase for the first time since 2004. This ruling is meant to add more income to the average worker’s paycheck. 

The earnings threshold update is not limited to just hourly workers. Highly paid executives (HCEs) have also been included in the new ruling. Their earnings threshold is increasing from $100K to $134K. Workers in this group must regularly perform one or more exempt responsibilities, or duties of an administrative, professional or executive employee. In addition, they must also be primarily office workers in a non-manual capacity. 

How Bonuses and Sales Commission Are Affected

According to the new rules, bonuses and sales commission can now be counted towards an employee's overall salary, up to 10%. This means that businesses can use this threshold to help determine whether their staff members are exempt or nonexempt from overtime pay. An important factor in this portion of the ruling states that commissions and bonuses must be paid at least quarterly in order for this income to be included in the threshold.  

Outsides sales employees who are commission-only will continue to be exempt from old and new Federal earnings requirements.

With the new earnings update, particularly concerning commission and bonus payments, it is now more important than ever for businesses to closely manage these types of payments on a consistent basis. If you don’t currently have a commission management plan in place, now is a great time to start. If you do have one, you may need to make some changes in order to be compliant with the new rules, and maintain a healthy overall revenue for your company.

Nondiscretionary Bonus Payments

Another important factor in this area includes whether the worker's earnings are discretionary or nondiscretionary. The new ruling only allows nondiscretionary earnings to be counted towards an employee's overall salary. According to the Department of Labor, earnings are considered nondiscretionary when the employer contracts, promises or agrees to compensate the employee with a bonus. These types of payments may include: 

• Bonus payments promised to staff members at the start of their employment
• Bonus payments for attendance
• Bonus payments for work quality and efficiency
• Bonus payments for group and/or individual production

Discretionary Payments

Not all earnings can be included as nondiscretionary. Some payments are considered discretionary, and employers are not required to factor in these types of payments when determining their staff members exempt or nonexempt overtime status. Some common types of discretionary payments may include:

• Gift during holidays or other special occasions.
• Holiday pay
• Vacation pay
• Sick leave
• Premium overtime pay

Yearly Earnings Threshold Updates

If you’re feeling a bit overwhelmed with all of the changes, please note that this is only the beginning. Going forward, the Department of Labor will update the compensation and salary levels automatically, on a tri-yearly basis. Based on the projections of wage growth under the new ruling, the threshold is expected to increase to $51K by January 2020, which marks the first tri-annual increase.

Getting up to speed on these changes ahead of time will help ensure that your business is prepared, and ready to proactively manage employee hours and staffing needs according to the new laws. Commission payments should be monitored and managed closely, and all employee earnings should be analyzed in order to develop a staffing plan that’s right for your business.

If you want to ensure that you calculate OT pay easily yet accurately, it’s worth checking out sales commission software such as QCommission and Nirvaha.