On May 18, 2016, the U.S. Department of Labor ("DOL")
issued its final rule updating and revising the overtime exemptions
for executive, administrative, and professional employees under the
Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201,
et seq. (the "Final Rule"). Effective December
1, 2016, the Final Rule more than doubles—from $23,660 to
$47,476 on an annual basis—the minimum salary to satisfy
these exemptions. As a result, employers must immediately examine
their currently exempt workforce and, with potential business
impacts in mind, make careful determinations about those who fall
below the increased salary threshold. Employers must consider, for
example, whether to raise their salaries to meet the threshold or
reclassify them to non-exempt. If reclassified, employers must
decide whether to reduce their hours worked to avoid paying
overtime, whether to reallocate hours worked among existing
employees, and how reclassified employees should record their time
worked, among a host of other considerations.
The Final Rule has another significant feature: automatic increases
to the threshold salary level every three years. This is the first
time in its 78 years of enforcing the FLSA that the DOL has
asserted that it has the authority to mandate automatic salary
level increases. But there is significant doubt as to whether this
component of the Final Rule complies with Section 13 of the
FLSA.
Executive, Administrative, and Professional Exemptions Under the Final Rule
The FLSA generally requires employers to pay employees at least
the minimum wage, and overtime if employees work more than 40 hours
in a week. 29 U.S.C. §§ 206-07. The statute, however,
exempts certain employees—such as those employed in
administrative, executive, or professional positions—from
these protections. See 29 U.S.C. §213(a)(1); 29
C.F.R. § 541.
To qualify for the executive, administrative, or professional
exemption, an employee must satisfy three criteria:
- The employee must be paid on a salary basis not subject to reduction based on quality or quantity of work ("Salary Basis Test");
- The employee's salary must meet a minimum level ("Salary Level Test"); and
- The employee's primary job duties must involve the kind of work associated with executive, administrative, or professional employees ("Duties Tests").
The Final Rule generally maintains these three criteria but sets
the Salary Level Test at the 40th percentile of earnings of
full-time salaried workers in the lowest-wage Census Region,
currently the South, which is $913 per week or $47,476 annually.
Thus, the Final Rule more than doubles the Salary Level Test from
its current level of $455 weekly.
Additionally, the Final Rule increases the minimum salary to
qualify for the "highly compensated" employee exemption
from $100,000 annually to the 90th percentile of full-time salaried
workers nationally, which is currently $134,004. To qualify for
this exemption, in addition to satisfying the salary requirement,
an employee must regularly perform at least one of the primary
duties of a professional, administrative, or executive employee,
and not perform manual labor.
The Final Rule also sets automatic increases in the threshold
salary levels on January 1 every three years, beginning January 1,
2020.
In enacting the Final Rule, the DOL noted its efforts to minimize
burdens on employers. For example, the DOL did not change any of
the Duties Tests, thus leaving in effect the now-familiar duties
requirements of the professional, administrative, and executive
exemptions. In addition, the Final Rule permits employers to count
nondiscretionary bonuses and commissions earned by employees as up
to 10 percent of the employee's annual salary, if payments are
made at least quarterly. The following chart summarizes exemption
requirements under the Final Rule:
Initial Steps Employers Should Take to Comply With the Final Rule
To ensure compliance with the Final Rule by December 1, 2016,
employers should consider promptly taking the following
steps:
Identify positions currently classified as exempt that may
become non-exempt when the new rules take effect.
Currently, employees who earn a salary of at least $455 per week,
or $23,660, are exempt as long as they also perform job duties that
satisfy one of the Standard Duties Tests. Under the new DOL
regulations, currently exempt employees will no longer be exempt
from the FLSA's requirements unless they earn a salary of at
least $913 per week, or $47,476 per year. Therefore, employers
should identify exempt-classified employees who currently earn
between $23,660 and $47,476 annually.
Consider how business operations will be affected by
employee reclassification or salary adjustments, and design a plan
best suited to meet the needs of the business. The
DOL's new regulations do not require employers to reclassify
currently exempt employees. Rather, employers have options for
ensuring they comply with the new rules. For example, employers may
provide pay raises to bring employees' salaries up to the new
salary-level threshold, reduce or eliminate overtime hours for
individuals who do not meet the new Salary Level Test, pay overtime
to salaried employees who no longer qualify for an exemption, or
some combination of these options. The determination on how best to
proceed will require company attorneys to work hand in hand with
management and human resources to assess potential business
impacts. Attorneys should take steps during the process to maintain
confidentiality and attorney-client privilege protections.
Consider impacts to employee relations, timekeeping and
payroll systems, and the need for training to maintain compliance
with the FLSA's recordkeeping provisions. If an
employer chooses to reclassify some employees as non-exempt, it
must also consider the employee relations implications. This
includes the effect on morale of employees who consider themselves
managers and professionals, but now must record their time worked.
Employers also must consider the impact the new classification may
have on payroll, timekeeping, and other internal recordkeeping
operations. Newly non-exempt employees may be unfamiliar with
tracking and reporting the hours they work and may need training to
ensure all records are maintained accurately.
Consider how potential changes interact with other FLSA
requirements. Employers must also be aware that any
changes to its business model or employee classification may
implicate other provisions of the FLSA. For example, employers
should instruct reclassified employees to record all time worked,
and implement policies prohibiting off-the-clock work if necessary.
Likewise, if employers decide to reclassify employees to non-exempt
and overtime eligible, employers should consider whether additional
payments, such as holiday and inventory bonuses, must be included
in the regular rate of pay for the purposes of calculating
overtime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.