What the new OT rule means to PMPs

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The U.S. Department of Labor’s (DOL’s) new overtime (OT) rule, scheduled to go into effect Dec. 1, 2016, might sting a little, but I don’t think it will change the way pest management professionals (PMPs) do business in a profound manner. That is, unless they are out of compliance with current DOL regulations.

By truly understanding the change, and determining whether they are paying their employees properly according to current law, many PMPs will realize they are currently applying the rules incorrectly. Moving to compliance might be scarier than complying with the new rule. Under the new rule, the way an employee is categorized has not changed in terms of using exemptions. Rather, the threshold amounts that allow an employee to be paid a salary using one of the exemptions are changing.

Too many PMPs believe they can simply pay employees a salary to avoid paying OT. Even before the rule change, this type of payment arrangement is a slippery slope. The employee has to meet certain requirements to be paid a salary. If he or she doesn’t meet those requirements, the employer is out of compliance.

This is not because of the changes to the law, it’s because the owner is not applying the current law correctly. The changes will only affect those employees who are paid a salary that use one of the “white-collar exemptions” (discussed below) as justification for paying in this manner.

For PMPs who are currently paying employees properly and using the white-collar exemption properly, and have salaried employees who fall below the new minimum, some decisions will need to be made. But those are the only employees affected by the new rules.
 

Who is exempt?

For the most part, pest management firms employ service technicians, inside and outside salespeople, office staff, customer service representatives (CSRs), and managers and supervisors. Two concepts are relevant here:

• Non-exempt employees — These are employees who must be paid hourly plus OT after 40 hours per week. Technicians by definition are non-exempt; however, they may fall under a provision called 7(i) (see “What is the 7[i] exemption?” opposite page). Check with your state DOL, as some state rules are more stringent than the federal rules regarding OT and do not accept 7(i) as an exemption. In any event, technicians are not the employee class affected by the proposed rule change. Also, most CSRs and other office people must be paid hourly plus OT, as they do not meet the white-collar exemptions. Here again, this class of worker is not affected by the proposed rule change because they do not qualify for exemption and must be paid hourly plus OT.
• Exempt employees — These are employees who can be paid a salary and are exempt from OT by virtue of meeting one of the exemptions in the Fair Labor Standards Act (FSLA). Therefore, any employee who does not qualify for an exemption must be paid an hourly rate plus OT. There is no proposal to change this rule. Unfortunately, many companies use this rule incorrectly to classify some of their employees as exempt. They pay a salary to employees who clearly do not meet the definition, and therefore these companies are exposed when they come under a DOL audit. My fear is that many think that this is the change. It is not. If you are classifying your employees incorrectly so you can pay a salary, I recommend you correct this situation.

What are the exemptions?

What follow are the white-collar exemptions that qualify for employees to be paid salary, not an hourly wage. These are the job classes that will be affected by the rule changes. Currently, each of these classes is defined by its duties tests. But in all cases except highly compensated employees (read on for more), there is a minimum requirement that the salary be at least $23,660 per annum. The new rule raises this amount to $47,476 per year. It’s this raise in the minimum salary for these white-collar exemption classes that has caused all of the debate.

Remember, just because you pay a staff member a salary does not mean you are correct in classifying that employee as exempt. We’ve worked with many clients who have learned this the hard way as they came up on the short end of a DOL audit.

• Administrative employees — While many CSRs may fall under this exemption, other staffers do not. This is an area in which we see many PMPs getting trapped during an audit, when it comes to light that the employee doesn’t meet the duties test to use this exemption, and therefore must be paid hourly. View a downloadable PDF with more information on the duties test.
• Executive employees — This is the area in which most managers will fall. As long as they direct the work of two or more other employees, and have the ability to hire and fire or have significant influence with this regard, you should be OK. However, under the new ruling, each manager will need to make a minimum of $47,476 per annum. If that’s not the case, you have the option of either moving the person to hourly, or giving a raise.
• Professional employees — This exemption is not usually used at pest management firms. Rather, it is used for work that is “predominantly intellectual in character,” such as computer engineers, teachers or other, similarly skilled workers.
• Highly compensated employees — Defined as currently earning more than $100,000, with the rule change to move up to $134,004, this exemption speaks for itself.

The bottom line

Remember, it’s not technicians who are affected by the change; it is those employees to whom you pay a salary using the white-collar exemption. Look at all of your non-technician or commissioned employees you pay a salary. Revisit the exemption definitions. If they don’t meet the requirements, put them on hourly plus OT. If they do meet the definitions, but their salary is less than $47,476, decide what to do to comply. The choices are give them a raise or put them on hourly plus OT. Good luck.
 

What is the 7(i) exemption?

In many states, but not all (check with your state Department of Labor, or DOL), technicians may qualify for an exemption called 7(i). This exemption is complex and confusing, but when used properly it can be very effective. If a retail or service employer elects to use the Section 7(i) overtime exemption for commissioned employees, three basic conditions must be met:

1. The employee must be employed by a retail or service establishment.
2. The employee’s regular rate of pay must exceed 1.5 times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked.
3. More than half the employee’s total earnings in a representative period must consist of commissions.

Unless all three conditions are met, the Section 7(i) exemption is not applicable, and overtime (OT) premium pay must be paid for all hours worked over 40 in a workweek at 1.5 times the regular rate of pay. DOL has provided a downloadable PDF with more information.

Should you decide that 7(i) is not for you, or you are in a state in which it is not accepted, you must pay hourly plus OT. If you want to pay production bonuses and/or commissions, you can. However, such payments must be increased by a “special” OT rate if the employee has worked more than 40 hours. ADP, provider of payroll services and human resources management solutions, has a nice fact sheet.

Contributor Daniel Gordon is a CPA in New Jersey and owns PCO Bookkeepers, an accounting firm that caters to pest professionals throughout the U.S. He can be reached at info@pcobookkepers.com.