New FLSA Overtime Rules

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FLSA Background

New FLSA Overtime Rules. The DOL issued final rules under the Fair Labor Standards Act (FLSA) that will substantially increase the minimum salary requirement for certain exempt employees effective December 1, 2016. This change will make an estimated 4.2 million additional workers eligible for overtime pay.

The overtime rule changes affect the classification of non-exempt and exempt employees.

Non-Exempt Employees

Most hourly employees that receive overtime pay after 40 hours of work per week at 1.5 times their regular rate of pay.

Exempt Employees

Salaried employees that are “exempt” from receiving overtime pay.

To qualify for “exempt” status, employees must satisfy the below three tests:

1) Salary-Level Test

Employers must pay employees a weekly salary that meets the FLSA minimum salary requirements.

2) Salary-Basis Test

Employers must pay employees their full salary in any week they perform work, regardless of quality or quantity of work.

3) Duties Tests

Employees’ primary job duties must meet certain criteria for executive, administrative, professional, computer, and outside sales exemptions.

Overtime Rule Changes

The primary change being made to the FLSA overtime rules is to test #1, the salary-level test. The salary-basis test and the duties tests are not changing at this time.

NEW SALARY REQUIREMENTS

Starting December 1, regular employees with salaries between $23,660 and $47,476 will now be eligible for overtime pay.

Salary Requirments regular-employees

In addition, non-discretionary bonuses, incentive payments, and commissions that are paid at least quarterly can now satisfy at least 10% of the minimum salary requirement for regular employees.

There is also a minimum salary requirement increase for highly compensated employees from $100,000 to $134,004 annually.

FUTURE INCREASES

Automatic updates to these minimum salary requirements will commence every three years beginning January 1, 2020, and notification will be provided 150 days before the effective date.

Implementing the Changes

The DOL has defined parameters for implementing the new salary requirements.

CHANGING SALARIES

As of December 1, exempt employees must be paid a salary of at least 90% of the minimum salary level each workweek—$821.70, or $42,728.40 annualized. This is based off of the 10% non-discretionary compensation.

At quarter end, any shortfall to the total $47,476 requirement must be made up by the employer in the first pay period of the next quarter.

NOTIFYING EMPLOYEES

Certain state laws require that employees receive advance notice of seven to 14 days for changes in pay. However, some states mandate 30 days or more. It is suggested to provide as much time communicating these modifications as possible.

Options for Compliance

There are two options for employees who are currently exempt (not being paid overtime) and are not being paid the new minimum salary requirements.

Increase Salaries

Increase employee salaries to meet the new requirement, provided the duties test is satisfied.

Reclassify Employees

Reclassify employees as non-exempt and pay overtime for hours worked over 40 hours per week.

IMPORTANT CONSIDERATIONS

If an employee is earning a higher wage and often works overtime, then it might make sense to leave them at exempt status and raise their salary to the new minimum of $47,476, assuming their role is deemed exempt by the duties test (see below).

But for employees currently earning close to the current $23,660 minimum that rarely work overtime, it might make sense to reclassify them as non-exempt and pay overtime when it is incurred.

THE DUTIES TESTS

While the DOL did not change the duties tests, they are another important component for determining the classification of employees since they define the job duties required to qualify for exempt status.

To be considered exempt, regular employees must pass the below Duties Tests and earn at least $913 per week on a salary basis, or $47,476 annually, as of December 1.

Highly compensated employees are exempt if they perform even one of the exempt duties of an executive, administrative, or professional employee outlined below.

Job Definitions for Duties Tests

Executive Employee:

Primary duty managing the enterprise, department or subdivision of the firm.
Directs the work of two or more employees or their equivalent.
Has authority to hire or fire and/or make recommendations that carry weight.

Administrative Employee:

Primary duty performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.
Exercises discretion and independent judgment with respect to matters of significance.

Learned Professional Employee:

Primary duty performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized instruction.
Advanced knowledge was obtained by completing an academic course of study resulting in a four-year college degree or leading to certification.

Creative Professional Employee:

Primary duty performing work requiring invention, originality or talent in a recognized field of artistic endeavor such as music, writing, acting and graphic arts.
Requires more than intelligence, diligence and accuracy; requires talent.

Computer Professional Employee:

Primary duty is application of system analysis techniques and procedures, including consulting with users to determine hardware, software or system specifications.
Design, development, documentation, analysis, creation, testing or medication of computer systems or programs including prototypes, based on and related to user or system design specifications.

Outside Sales Employee:

Primary duty is making outside sales.
Regularly works away from company’s place of business.
Sells tangible or intangible items, such as goods, insurance, stocks, bonds or real estate, or obtains order or contracts for services or the use of facilities.

HANDLING RECLASSIFICATION

Assess and analyze current employee state, ensure exempt employees are properly classified under the final rule, and handle any reclassifications that are necessary to remain compliant.

Cost of Non-Compliance

Misclassifying employees can be costly and time consuming. Although it is fact sensitive in terms of how the DOL or a court will assess damages against an employer that fails to comply with the FLSA, below is a general overview of what is typically at stake to the business:

Out of Pocket Costs

Back overtime compensation PLUS an equal amount as “liquidated damages”
Post-judgment interest
Civil penalties up to $1,100 per person
Plaintiff’s attorney’s fees/costs
Employer’s defense fees/costs

Legal Ramifications

A two-year limitations period; three years for willful violations
Future court-ordered compliance
Liability for management
Criminal penalties

Business Impact

Diversion of resources
Distraction of management and employees
Disruption to business operations
Adverse publicity

PREPARING FOR A DOL AUDIT

Compare overtime laws with firm’s processes and ensure compliance.
Review job descriptions in question.
Interview managers to ensure employee job descriptions are accurate.
Determine employees’ job duties and review timekeeping records.
Assess current exempt employee roles to identify amount of time allocated on all tasks performed.
Confirm employees perform their jobs as assigned and work the hours designated by management.
Check overtime records to ensure pay consistency and uncover discrepancies.