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Dealerships: Are you ready for the new overtime rules?

October 27, 2016

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Since the 1930s, U.S. businesses have relied on rules detailed in the Fair Labor Standards Act (FLSA) to determine which employees are eligible to receive overtime pay. These rules are scheduled to change on December 1, 2016, for the first time in over a decade.

The result of the change may be a dramatic increase in the number of salaried dealership employees who could become eligible to receive overtime. There’s not much time before the change takes place, so start planning now for how you can lessen the impact of the rule change on your dealership.

What the law requires

The FLSA requires businesses to pay nonexempt employees a minimum of time-and-a-half for each hour they work beyond 40 hours per week. The exemption has traditionally applied to white-collar workers, such as executive, administrative and professional employees or highly compensated employees (HCEs) who earn at least $100,000 per year.

The rule change issued earlier this year by the Department of Labor will more than double the salary threshold for overtime pay, raising it from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year). Going forward, automatic adjustments for inflation will be made to these figures every three years, starting in January of 2020.

In addition, the salary threshold for determining whether certain HCEs are exempt is also being increased, rising from $100,000 to $134,004 annually. HCEs must continue to receive the full standard salary amount of $913 per week on a salary or fee basis without regard to nondiscretionary bonus or incentive payments. But these payments will count toward the total annual compensation requirement.

Once the rule change becomes effective, some of your employees who haven’t received overtime pay in the past may no longer be exempt. This could have a big impact on your dealership’s operations and finances.

Review job positions

In light of the upcoming rule change, you should take time now to review your salaried but exempt positions. In most dealerships, these include such positions as customer relationship managers, assistant department managers, business development center managers, assistant department managers and administrative assistants.

To preserve the exempt status of department managers who receive commissions, make sure that these employees’ pay plans guarantee that they are paid at least the new annual salary threshold of $47,476. You can accomplish this by paying them a base salary or guaranteed commissions of at least this much.

Also take a close look at the actual duties being performed by your managers. Sometimes, dealerships give employees a “manager” title, but the employees aren’t really performing duties that would exempt them from receiving overtime pay. Examples might include F&I managers and car wash/detail supervisors who aren’t managing or overseeing other employees. Misclassification errors with employees like these could result in costly overtime liability claims against your dealership.

Here are a few more strategies to consider implementing before the rule change takes effect:

  • Cap the number of hours that newly eligible overtime employees can work — this might require some planning in terms of shifting responsibilities so employees’ workloads are more evenly distributed.
  • Raise salaries above the new threshold — this could make sense for employees who are currently earning near the new threshold amount by keeping them exempt.
  • Pay overtime wages to newly eligible employees.

In the last instance, you could, for example, pay these employees a salary for the first 40 hours worked per week plus overtime for hours worked beyond 40. Or you could pay them a salary for a workweek of more than 40 hours that includes extra compensation for overtime under certain conditions.

Overtime exemption: Three tests

Three different tests can be used by dealerships to determine whether or not an employee is considered exempt for overtime wage purposes. They look at an employee’s level of pay, how an employee is paid (salary or hourly), and the specific duties the employee performs.

A change to the Fair Labor Standards Act rule governing overtime pay, scheduled to take effect on December 1, 2016, mainly affects the first exemption test. The other two tests aren’t significantly impacted by the rule change. For example, dealership employees must still receive a salary to be considered exempt — this means they are paid a fixed wage that can’t be reduced due to variations in the quality or quantity of their work.

Also, employees must perform executive, administrative or professional job duties to be considered exempt. These generally include such tasks and responsibilities as supervising other employees and exercising discretion and independent judgment in the performance of their jobs.

Get expert guidance

The right solution for your dealership will depend on a number of different factors. You should consult with your financial advisor and an attorney for guidance in your particular situation.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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