On May 10, 2016, we sent out a newsletter regarding the U.S. Department of Labor’s (“DOL’s”) proposed changes to the overtime regulations under the Fair Labor Standards Act (“FLSA”). https://law.marshallhalem.com/preparing-new-federal-overtime-exemption-rules. On May 18, the DOL published its Final Rule which will go into effect on December 1, 2016.
As an overview, the FLSA is the federal law that governs the payment of wages by most United States employers. Among other things, the FLSA establishes the federal minimum wage and overtime pay requirements for full-time and part-time workers throughout the country. The U.S. Department of Labor’s Wage and Hour Division administers and enforces the FLSA.
The DOL has not amended the rules on the payment of overtime since 2004. The DOL predicts that approximately 4 million workers will be effected by these new rules and some commentators are saying this may be one of President Obama’s biggest legacies.
The FLSA allows employers to exempt some executive, administrative, and professional employees (as well as some other categories) from overtime pay, even if they work more than 40 hours per week (“Exempt Employees”).
NEW MINIMUM SALARY FOR EXEMPT EMPLOYEES
Effective December 1, 2016, all Exempt Employees must be paid a minimum salary of $913 per week ($47,476 per year). This threshold is lower than the previously proposed minimum salary of $970 per week ($50,440 per year), but it is still more than double the prior minimum salary for exempt employees of $455 per week ($23,660 per year).
The new regulations also raise the total compensation level for highly compensated employees to be exempt, from the current $100,000 to $134,004.
The DOL also established automatic increases to the salary levels that will take effect every three years, with the next increase automatically occurring on January 1, 2020. The new salary levels will be published at least 150 days prior to that date.
NO CHANGES TO “DUTIES” TEST
It is important to note that, as predicted, the new regulations do not amend the “duties” tests for any of the FLSA exemptions. Employers continue to have to satisfy these tests, in addition to satisfying the higher minimum salary threshold. The DOL states in the Final Rule that “while the salary provides an initial bright-line rule for the … exemption,” employers must remember that “meeting a duties test remains a core requirement for the exemption.”
NONDISCRETIONARY BONUSES AND INCENTIVE COMPENSATION
The new regulations make it slightly easier for employers to meet the new minimum threshold by allowing employers to apply nondiscretionary bonuses and other incentive compensation, such as commissions, towards 10 percent of the minimum salary threshold ($4,7447.60). To take advantage of this allowance, the employer must meet the minimum salary threshold on a quarterly basis. At the end of each quarter, the employer must ensure that the salaried exempt employee made at least $11,869, with no more than $1,186.90 coming from incentive compensation. Employers will be permitted to do catch up payments to meet this threshold after the end of each quarter.
FLEXIBILITY IN TRACKING HOURS
The DOL has also detailed how it will approach time-keeping requirements for white collar employees and discussed some creative approaches for paying previously exempt employees overtime. The DOL recognizes that many white collar employers will not want to change to a punch clock method for time keeping. Instead, employers may use any method they choose for tracking and recording hours – including asking workers to record their own time – as long as the method is complete and accurate.
ADDITIONAL GUIDANCE FOR NON-PROFITS AND HIGHER EDUCATION
In publishing the new rule, the DOL included helpful guidance for both non-profits https://www.dol.gov/whd/overtime/final2016/nonprofit-guidance.pdf and institutions of higher education https://www.dol.gov/whd/overtime/final2016/highered-guidance.pdf. In particular, the DOL has outlined how non-profits can determine whether they are or are not covered by the FLSA, by determining whether their organization as a whole is covered (“enterprise coverage”) or whether individual employees are covered (“individual coverage”). This is a useful exercise for all non-profits. Of course, non-profits should remember that even if they determine they are not covered by the FLSA, they will be covered by state wage and hour laws.
Employers should start taking steps now to prepare for these changes:
- Review Pay Information For Current Exempt Employees
Any employee currently categorized as exempt and earning below $47,476 per year may be affected by the changes. As a preliminary step, we recommend reviewing how many current employees fall within this category and their work hours. If these employees rarely work more than 40 hours per week in their current roles, you may not need to make significant changes to your pay structure. However, you will need to begin keeping track of their hours and reclassify them as hourly.
- Consider Potential Options for Employees Who Will Be Reclassified as Non-Exempt
For employees who will be affected by these changes, employers have a number of options to consider. These options include:
- Reclassifying these employees as non-exempt, and paying overtime at 1.5 times their current hourly rate.
This option may make sense for employees who rarely work more than 40 hours per week in their current roles. Non-exempt employees may continue to make their current salary, even if it is below $47,476 per year, as long as they are paid overtime for any additional hours worked beyond 40 hours per week.
- Assigning each employee a pay rate that reflects the number of hours the employee works.
For example, if you know the employee regularly works 45 hours a week, you can set a base hourly rate and corresponding overtime rate that approximates the employee’s current overall compensation. In doing so, you should be careful not to reduce base pay rates below the state minimum wage. While the federal minimum wage remains $7.25, many states have recently enacted higher minimum wages, including Massachusetts ($10; increasing to $11 effective 1/1/2017), New York ($11 effective 12/31/16; increasing to $15 by 2018), and California ($10; increasing to $15 by 2022). Employers should be careful not to reduce an employee’s hourly wage below their state’s minimum wage before taking overtime into account.
- Eliminating or reducing discretionary bonuses and incorporating these bonuses into regular pay.
The new regulations allow employers to use incentive payments and nondiscretionary bonuses to satisfy up to 10 percent of the salary test requirement. Above that threshold, bonuses and commissions are not included when calculating the salary threshold for exempt employees. If employees are earning bonuses or commissions, incorporating a portion of these payments into regular pay or overtime pay could reduce the impact of the FLSA changes. However, employers should also be wary of giving hourly employees bonuses, as these typically effect the base rate and correspondingly the overtime rate for the weeks in which they are given.
- Eliminating or reducing overtime hours.
This may require changes to staffing models and business hours.
- Increasing salaries above the $47,476 threshold.
Any exempt employee earning more than $47,476 can remain exempt and will not require overtime pay. If you have employees who are currently earning salaries just under the new threshold, the best option may be increasing their pay above the threshold so they remain exempt. Of course, whether you have properly classified the employee as exempt in the first place is beyond the scope of this Newsletter. However, in summary, employees must satisfy various tests before they can be properly classified as exempt, in addition to meeting the minimum salary requirements.
Please do not hesitate to contact us if you have any questions about your obligations under the new regulations or strategies for reducing the impact of these changes on your business. We are also happy to work with our clients to evaluate whether employees are properly classified as exempt based on their job duties.
For many clients, we regularly perform audits on this issue, reviewing job classifications and job descriptions/duties.