On May 18, 2016, the Department of Labor (“DOL”) announced a new final rule which adds regulations to the Fair Labor Standards Act (“FLSA”). These new regulations set new standards for which employees will be “exempt” from the FLSA and thus not eligible for overtime pay.  These regulations will be effective December 1, 2016, and will apply to nearly all employers, including non-profits.  These new regulations have changed: (1) the white collar exemptions for executive, administrative, and professional workers by dramatically increasing the salary amount these employees must make before they can be considered  “exempt” from overtime pay under the FLSA; and (2) substantially increasing the amount a highly compensated employee  must be paid before such an employee can be considered  “exempt” from overtime pay under the FLSA.

In general, a salaried white collar employee is currently entitled to time and a half overtime pay for all hours the employee works over the standard 40 hour work week, unless such an employee meets the exemption tests.  Currently, the executive, administrative and professional white collar workers are exempt from overtime pay (employers do not need to pay overtime) if the employee qualifies under three tests:

  1. The Salary Basis Test. The white collar employee must receive a fixed salary every week that is not subject to change due to variations in the quality or quantity of work;
  2. Minimum Salary Test. The white collar employee must receive a minimum salary, currently set at $455 per week, $23,660  annually; and
  3. Job Duties Test. The employee perform work that primarily involves executive, administrative, and/or professional duties as defined by FLSA regulations.

By 2016, the current annual salary amount, $23,660, or $455 a week, was less than the federal poverty level.

A “highly compensated” employee is currently considered “exempt” from overtime pay if the employee makes a minimum of $100,000 annually, and meets any other requirement imposed by the FLSA.

Specific Changes and Impact of the New 2016 FLSA Regulations

The new minimum salary test.  Effective December 1, 2016, the minimum salary for any employee from overtime jumps to $47,478 annually ($913 a week).  (This amount is equal to the 40th percentile of full-time salaried workers in the lowest-wage Census Region of the U.S., currently the South).  As of December 1, 2016, any salaried employee not meeting this new minimum must either:

  1. be converted into an hourly paid employee (“non-exempt”), have their hours tracked by the employer, and be paid overtime for all hours worked over 40 in a standard work week (be sure and check the law in your state, since the FLSA does not prevent a state from requiring overtime greater than that required under the FLSA); OR
  2. be given a pay raise to meet the minimum salary required under the new FLSA regulations.

Be aware that not all compensation paid to an employee can be counted toward the $47,478 annual minimum.  Incentive pay, non-discretionary bonuses, and commissions can be counted toward the minimum, up to 10% of the new salary minimum, if they are paid to the employee quarterly or more frequently.  Also, the new regulations also allow for a catch up payment each quarter, if the catch up payment is paid within one pay period after the quarter ends. Certain types of compensation cannot be counted toward the $47,478 minimum, such as employer retirement contributions, fringe benefit payments, and lodging.

To avoid inflation devaluing the actual value of the new minimum salary, the new regulations require that the minimum salary will be updated every three years, starting on January 1, 2020.  Such automatic increases will be posted by the DOL 150 days in advance, starting on August 1, 2019.

Increased Amount Required for Highly Compensated Individuals Exemption

The new 2016 overtime regulations (final rule) sets the highly compensated level equal to the 90th percentile of earnings of full-time salaried workers natonally ($134,004 annually).  To be an exempt highly compensated employee, such employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test.  If the highly compensated individual meets the above standards, then the employer does not need to pay the employee overtime.  This new amount required for highly compensated individuals will also be automatically adjusted by January 1, 2020, and every three years thereafter.

General Impact of the New 2016 FLSA Regulations

 The DOL estimates that the new 2016 overtime regulations will cause 4.2 million workers who are currently exempt and not paid overtime, to directly become non-exempt and entitled to overtime pay.  The DOL also projects that the new regulations will indirectly affect another 8.9 million employees by reducing the ambiguity of status: in other words, such 8.9 million employees should have been classified as non-exempt originally, based on their job duties.  If these 13.1 million workers are affected as projected, it would change the exempt status of slightly less than 9% of the U.S. workforce.  To put that in perspective, a proposed but not yet passed $15 minimum wage would affect close to one-third of the U.S. workforce.

What Should Employers Do Now?

  Because the DOL’s budget for Fiscal Year 2017 includes $277 million for wage and hour enforcement, an increase of $50 million from Fiscal Year 2016, the following suggestions should be considered by employers.

  • Identify all exempt employees who must be reclassified under the new regulations by December 1, 2016, and get them reclassified.
  • Determine how many hours these reclassified employees have worked and how the employer will track their hours when reclassified as non-exempt employees. Many employers may not be currently aware how may hours their exempt employees are working.  Be careful to look at waiting time, meal and rest periods, travel time, training time, and any other “hidden overtime.”  Such calculations will allow the employer to project what the real cost of reclassifying an exempt employee as non-exempt (and paying overtime) will be.
  • Determine whether it makes sense to raise the salary of certain exempt employee to the new minimum, by carefully weighing the cost against what the employer will really pay if that employee is reclassified as “non-exempt” and overtime has to be paid. If an employee constantly works substantially more than 40 hours a week, paying him or her overtime may be much more expensive than simply raising the salary to the new minimum and keeping the employee “exempt” from overtime.  On the other hand, if an employee never works over 40 hours per week, then the employer will never have to pay overtime anyway even if the employee is reclassified as “non-exempt.”  Furthermore, it is legally permissible to re-do hourly rates going forward if that is what has to be done to contain costs to stay in business.
  • Make sure you have a practical plan to precisely track hours worked by any worker who is reclassified from “exempt” to “non-exempt,” since there are serious penalties for failing to carefully track all hours worked by non-exempt employees. Remember that not only obvious hours worked must be tracked, but lunch breaks and other breaks must be tracked. Any time worked off the clock, if an employer is aware of it or allows it to happen, must also be paid for if the employee is “non-exempt.”
  • Think carefully about the impact on morale that reclassifying an employee from “exempt” to “non-exempt” may cause. Employees that are exempt may view being reclassified as non-exempt as a step down to a lower status.  Explain and point out to such employees that such changes should not result in a decrease in pay, and are required by law.
  • Consider whether or not you have to shift certain job functions and assignments to avoid undue overtime payments. Adjustments to salaries and hourly rates may also have to be adjusted.
  • Consider structuring certain jobs that have fluctuating overtime as agreements with straight hourly rates regardless of hours worked, and then if overtime is worked, you have already paid the hourly rates for overtime hours, and you then owe half time instead of time and a half for hours worked over 40 per week. These agreements can be tricky, so counsel should be consulted so they are carefully drafted, since they cannot be implemented in all situations.
  • Use the time before December 1, 2016 as a golden opportunity to review all your job classifications, to see whether they are properly classified. Some reports estimate that as many as 80% of employers are in violation of some of the FLSA rules, including classification of employees, at any given time.  With stepped up audits and investigations with the increased DOL budget, a company could avoid significant penalties, fines and liability if they would get their classifications done correctly.  In particular, many companies classify people as “independent contractors” when they are not, but are actually functional employees.  Being caught for such misclassification has serious tax, overtime, unemployment premium, and other consequences.  Another frequent problem area is employers improperly classifying employees as “exempt” under the administrative white collar exception.   Any employee classified as an exempt “administrative” employee should be double checked to see if they really meet the classification standards for the administrative exemption under the FLSA regulations.
  • Overall, realize that many of the FLSA regulations can be complex. An employer should consult experienced employment counsel before it is caught in a DOL audit, or an employee sues. It is much cheaper to fix the problem before it occurs. A stitch in time saves nine.
  • If the new minimum salaries are cost prohibitive, you may have to consider staff changes or consolidations.
  • If you are a retailer, you may still have other exemptions that will keep certain employees “exempt.” There are other specialized exemptions for various industries that are not eliminated by the new 2016 overtime rules, so you should consider consulting with employment counsel to see if there is another way to solve your potential problem.  For example, there are special exemptions for teachers from overtime rules, as well as many others that are too numerous to discuss in detail in this article.

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