What Do the New FLSA Exempt Pay Laws Mean for Fitness Business Owners?

Just when you thought that navigating the landscape of wage and hour laws was challenging enough, another mountain has cropped up on the horizon!  On May 18th, the Department of Labor announced major changes to the standard salary level for employees classified as exempt.  Under this new ruling, the salary threshold increases to $913/week ($47,476 per year) from $455/week ($23,660 per year). It was also announced that the DOL intends to automatically update the threshold every three years to adjust it to scale with exempt wage earners in the 40th percentile of the region with the poorest salary demographics (currently the south). 

As the new law goes into effect on December 1, 2016, business owners have some time to decide what adjustments should be made to their pay policies and staff structuring in order to comply.  Employers can:

  • Raise exempt employees’ salaries above the new threshold.
  • Switch exempt employees to hourly and limit their hours to 40 per week.
  • Pay time-and-a-half (double time in some states) for overtime work.
  • Some combination of the above.

What does this mean for the fitness industry?  The major impact will be to roles we’ve typically classified (in most cases correctly) as exempt, yet have consistently paid low base wages:  General Managers, Assistant Managers, and Fitness Directors.  It’s important to note that any commission or bonus pay may only account for up to 10% of the employee’s pay if it’s non-discretionary.  Non-discretionary incentives are tied to published goals and stipulations such as sales goals and profit targets.  Discretionary incentives, ones which are awarded on a purely subjective basis, may not be included.  In all likelihood, our industry will handle the change by moving most team members to hourly pay and requiring them to track work hours.  Here are a few key guidelines to consider as you make this shift:

Policy Changes

Make sure your employees are notified of the change in the method in which you intend to pay them and do so in writing.  Ideally, you have an employee handbook which addresses pay policies and practices.  Ensure all team members get an updated copy of this policy.   Be sure to clearly outline your policies for time keeping and scheduling.   Any change in the rate of pay should be documented and require employee signature. Finally, address overtime approval requirements and include a statement of how overtime will be paid.   

Overtime Payment

Speaking of overtime pay, it’s vitally important that any and all overtime worked is promptly (on the appropriate pay date) and properly paid.  If an employee is paid an hourly rate only and has no other method of increasing their earnings (commissions or bonuses), the calculation is simple; any hours worked in excess of 40 should be paid at 1.5x their hourly rate.  However, if, as with most of the positions mentioned at the beginning of this article, an employee earns commission and bonus, this pay must also be taken into consideration to determine an employee’s regular rate and to calculate overtime pay.  Example:  An employee has an hourly rate of $12/hour.  He also earns commissions totaling $250.   He works 46 hours for the week.

46 hours worked x $12/hour + $250 (commissions) = $802 (total ST compensation)

$802/46 hours worked = $17.43 (regular rate) 

$17.43 x ½ = $8.72 (half-time premium). 

$17.43 (regular rate) + $8.72 (half-time premium) = $26.15 (overtime rate)

Our employee’s pay for the week would be:

40 (straight time hours) x $17.43 (regular rate) = $697.20 (straight time earnings)

6 (overtime hours) x $26.15 (overtime rate) = $156.89 (overtime earnings)

Total earnings for the week:  $854.08

As you can see, calculating overtime pay when other incentives are involved can be somewhat tricky and labor intensive.  It’s important to develop a system to ensure this is done correctly. 

NOTE:  Some states have additional requirements for the payment of overtime wages.  For example, CA requires an overtime premium matching the employee’s regular rate (2x) and tracks overtime for the week (40 hours) and the day (8 hours).  It’s recommended that you consult with an attorney or HR professional who is well-versed in your state’s wage and hour laws.

Time Keeping Software

The most vital aspect of ensuring that you are paying accurately on all hours worked is your time keeping software.  The system should be easy to set-up and implement, provide for quick clock- in/out, and track all changes made to the time record with notes.  Not only is this system going to allow for painless payroll entry, but it will also be key to your defense should a wage and hour claim be brought against you.  As the employer, the burden of proof to provide documentation of all hours worked falls on you. 

ClubReady has a great time keeping system embedded within their club management software.  Along with tracking training sessions logged, it also allows for the tracking of all hours worked.  This is important for both the FLSA changes mentioned above, but also the swing we are seeing in most states requiring gyms to pay trainers based on hours worked vs. sessions trained (see recent cases against Gold’s Gym (TX), Equinox, and Life Time Fitness).  The system can be set-up to allow the time clock to function in parallel with the same method used for club check-in or training session tracking:  key tag, finger print, or PIN number.  Supervisors may make adjustments and add notation documenting the reason for any adjustments in the system (very important for pay disputes).  The time clock also displays as a widget on the employee’s dashboard so they can easily keep track of their current status and hours worked for the week.

Major changes in wage and hour laws are challenging to implement and can be majorly impactful on your businesses.  What’s most important is that you make thoughtful decisions on pay policy development and implementation.  Planning makes perfect.  Some time spent now on system selection and development will save you majorly later.