New Overtime Rules Could Affect Employee Exemptions
October 21, 2016 — Earlier this year the Department of Labor issued the final rule amending the Fair Labor Standards Act (FLSA) related to exemptions from minimum wage and overtime pay requirements. This final rule is effective December 1, 2016.
The final rule will entitle all employees to overtime (unless they are otherwise exempt), and it will apply to all organizations with sales of at least $500,000. It will also affect non-profit organizations at the same threshold, but only to the extent the activities are performed for business purposes and are not applicable to the organizations’ charitable activities.
Regardless of sales, if employees regularly engage in interstate commerce or in the production of goods for interstate commerce then the Fair Labor Standards Act will apply.
Failure to comply with the Fair Labor Standards Act subjects employers to civil monetary penalties. These penalties vary case by case for willful or repeated violations of the Act and allow an employee to bring a private claim for back pay, liquidated damages, and attorney’s fees.
Which Employees Could Be Affected by the New Rules?
Employers should take a look at those employees who are classified as either Executive, Administrative, and Professional (EAP) exempt or Highly Compensated Employee (HCE) exempt. If these employees meet the Salary Basis Test, Salary Level Test, and Duties Test below, the employer can continue to classify these employees as exempt as long as such employees meet the new minimum salary level test.
How Do I Know If My Employees Are Exempt from Minimum Wage and Overtime?
In order for an employer to exclude an employee from these new rules, three tests must be met:
- Salary Basis Test – The employee must be paid a predetermined and fixed salary that will not be reduced because of quality or quantity of work.
- Salary Level Test – The employee’s salary must be a minimum amount. The EAP exempt threshold is $913 per week or equivalent to $47,476 per year for a full-year. The threshold for HCE exempt workers is increased to $134,004 annually.
- Duties Test – The employee’s job duties are primarily executive, administrative, or professional as defined by the Fair Labors Standard Act.
It should be noted that these minimum salary levels will be automatically updated every three years beginning with January 1, 2020. So periodic reviews of your employees’ compensation will be necessary.
What If Some of My Employees Fall Below the Thresholds?
If any employees fall below the new minimum thresholds then the employer can either increase their salary to meet the requirement or reclassify them as a non-exempt employee. Once reclassified as non-exempt, then the employer is obligated to pay minimum wage and overtime pay with respect to these employees. The obligation begins for all hours an employee works over 40 hours in any given work week and is calculated on a weekly basis. State law could have stricter obligations, such as working more than 8 hours in a day.
What Else Can I Do to Meet Minimum Salary Levels?
Using non-discretionary payments to meet the minimum salary levels is allowed. These are payments promised to employees and not paid at the sole discretion of the employer.
For EAP exempt employees, employers will be able to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. The payments must be paid on a quarterly or more frequent basis and permits the employer to make a catchup payment. Where larger bonuses are paid the amount attributable toward the standard salary level is capped at 10 percent of the required salary amount.
For HCE exempt employees, Employers will be able to use non-discretionary bonuses and incentive payments (including commissions) to satisfy any portion of the minimum standard salary level. There is no frequency requirement for these payments.