How the New Overtime Regulations Will Affect the Real Estate Industry

By now, you’ve likely heard about the Department of Labor’s changes to the federal overtime regulations that will take effect on December 1, 2016.  The new rule applies to exempt employees and more than doubles the salary basis required to classify an employee as exempt.  Real estate professionals may have paid the update little attention, as so many real estate salespeople work as independent contractors, but it is important to recognize how this change will affect other individuals involved in the real estate business including managers, receptionists, and assistants.

Independent Contractor Misconceptions

You cannot simply label an individual as in independent contractor in order to protect your company from the expenses associated with employees.  A specific set of facts must be analyzed (under both state and federal law) to determine the appropriate classification of an individual.  Accordingly, if you have assumed this change is inapplicable because you only have “independent contractors” on staff, an in-depth analysis of your business model is likely necessary to confirm appropriate classification.  Further, your support staff likely will not qualify as independent contractors under either state or federal law, so even if your agents are independent contractors, others in your organization may be affected by this change.

Support Staff Exemptions

It’s important to look at how you are currently classifying your support staff—are they exempt or non-exempt employees?  These terms are often used interchangeably with the terms “salary” and “hourly;” the terms do not, however, have the same meaning.  While “salary” and “hourly” denote a payment structure, “exempt” and “non-exempt” are legal categories for which an analysis must be done to determine whether, under state and federal law, an individual is entitled to overtime for hours worked in excess of 40 per week.  Generally, all employees are entitled to payment of overtime wages at a rate of time and a half for all hours worked in excess of 40 in a week, unless the individual falls within an exemption to the overtime rules. 

In the real estate industry, the two most common exemptions are the administrative and executive exemptions.  Currently, to qualify for the executive exemption the employee must (1) be compensated at a rate of at least $455 per week; (2) be managing a recognized department or subdivision of the enterprise; (3) direct the work of at least two or more full-time employees or their equivalent; and (4) have the authority to hire and fire other employees or have a strong influence on those decisions.  To qualify as an administrative exempt employee, currently the employee must: (1) be compensated at a rate of at least $455 per week; (2) have primary work duties that require office or non-manual work directly related to the management or general business operations of the employer; and (3) exercise discretion and independent judgment with respect to matters of significance.

DOL Salary-Level Update

The overtime changes raise the weekly compensation rate required to qualify for exemption from $455 per week to $913 per week (or from $23,660 per year to $47,476 per year).  The “duties test,” however, will not change at this time.  The rule permits employers to use non-discretionary bonuses or commissions to satisfy up to 10% the $913 per week figure, but certain conditions must be met to do so.

In determining your best course of action in response to these changes, the first step is to identify any exempt employees who are currently making less than $47,476 per year ($913 per week).  Next, evaluate whether they are appropriately classified as exempt in the first place.  Did you perform the appropriate analysis when you originally created the position or speak to an employment attorney regarding classification?  If not, this is the time to have that conversation with an attorney.  Once you are sure an employee is properly classified, but is currently making less than $47,476, begin to consider your options to be in compliance with the law on December 1, 2016. Is it financially feasible to simply increase the employee’s salary to $47,476?  Does the employee regularly work more than 40 hours per week?  If not, changing them to a non-exempt hourly employee may make sense.  Beware, however, of the cultural and morale issues that could surround such a change.  If the employee is reclassified as non-exempt, you should also consider whether the employee travels often or works through electronic means on nights and weekends.  If that is the case, be sure to review what time is included in “compensable time.” 

Very few industries will find themselves unaffected by these changes, and the real estate industry is no exception.