Important note:
For the first time in many years, the Department of Labor (DOL) has revised the overtime requirements of the Fair Labor Standards Act (FLSA). These changes take effect on December 1, 2016 Employers must understand the changes and take action now to ensure compliance on and after the effective date.
Employers need to look at every employee’s job duties and pay to determine if they are properly classified and make whatever changes are necessary to comply with the FLSA. In order to ensure compliance by the December 1 deadline, this process should begin right away.
This section provides a detailed synopsis of the changes and practical tools for employers to ensure they remain in compliance.
What is the FLSA?
The Fair Labor Standards Act (FLSA) is a federal law, which:
- Establishes the federal minimum wage;
- Sets rules for overtime pay eligibility;
- Defines the 40-hour workweek;
- Lays out recordkeeping requirements; and
- Establishes child labor standards.
These requirements govern full-time and part-time workers in the private sector and in federal, state, and local governments.
Who is covered under the FLSA?
Technically, the FLSA covers:
- Employers (regardless of the number of employees) whose annual sales total $500,000 or more; or
- Employers who are engaged in interstate commerce.
As a practical matter, in today’s business environment, virtually all employers are covered by FLSA because the overwhelming majority of employers engage in some sort of activity that qualifies as interstate commerce (e.g., Internet presence, marketing campaigns, vendor relationships).
- Two FLSA employee classifications
There are two FLSA employee classifications — non-exempt (from overtime requirements) and exempt (from overtime requirements).
- Non-exempt
Most non-exempt employees are entitled to time-and-a-half of overtime for any hours worked over 40 per week (unless state law provides otherwise).
Hourly pay versus salaried pay is not a determining factor in non-exempt status. Many non-exempt employees are paid on an hourly basis and it is sometimes incorrectly assumed that hourly pay makes an employee non-exempt. However, an employee can be paid a salary for ease of administration and still be entitled to overtime. A salaried basis of pay alone does not make an employee exempt.
- Exempt
Exempt employees are not entitled to overtime pay for hours worked over 40 per week. Most exempt employees fall into the following categories:
- Executive, administrative, and professional (commonly referred to as the “EAP” exemption);
- Computer professionals;
- Outside sales; and
- Highly compensated employees (HCE).
- Exemption tests
In order to qualify for exemption from overtime requirements, there are both “duties tests” and “salary tests.” Most exemptions require meeting both applicable tests. A few require only one or the other.
- Executive, administrative, and professional (EAP) exemptions
The duties tests for the EAP exemptions have not been changed in 2016 and are set forth below. For EAP exemptions, the position is not automatically exempt if it meets the duties test. The EAP exemption salary test must next be applied.
The Executive exemption applies to an employee:
- Whose primary duty is management of the enterprise in which the employee is employed of a customarily recognized department or subdivision thereof;
- Who customarily and regularly directs the work of two or more other employees; and
- Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees are given particular weight.
- Overview of key 2016 FLSA regulation changes
The 2016 changes update the salary and compensation levels needed to qualify a job for the EAP and HCE exemptions. They also provide for periodic automatic updates to the salary and compensation thresholds and allow for attributing some bonus and commission payments to minimum salary levels.
What do these changes include?
- Increase minimum salary levels for EAP exemptions
The minimum salary requirement has been increased to $913 per week/$47,476 per year (up from $455 per week/$23,660 per year).
How did the DOL come up with this new amount? It is based on the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage census region, currently the South.
- Increase salary levels for highly compensated employees (HCE)
The HCE qualifying salary was increased to $134,004 per year (up from $100,000).
How did the DOL come up with this new amount? It is based on the 90th percentile of full-time
salaried workers nationally.
- Salary and compensation levels to be automatically adjusted to indexed percentages every three years
Every three (3) years the EAP exemption salary threshold will be automatically adjusted to equal the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region. Every three years the HCE qualifying salary will be adjusted to equal the 90th percentile of full-time salaried workers nationally. This will allow the tests to remain relevant by keeping pace with salary and compensation trends. The first automatic updates will take place on January 1, 2020. The DOL will publish the updated salary levels 150 days in advance of the effective date for any automatic update.
- Employers permitted to attribute some bonus and commission payments to minimum salary level
The DOL will now permit employers to attribute a small portion of nondiscretionary bonuses, incentive pay, and commissions toward the minimum salary level. For example, if an employee who meets the duties test to be covered by the EAP exemption earns 90 percent of the minimum required salary as salaried base pay ($821.70 per week), the additional portion of the required minimum salary level of $913.00 per week (up to 10 percent, or $91.30) may be made up through nondiscretionary bonuses, incentive pay, and commissions.
To be attributed, additional payments must be made at least quarterly. If bonus and commission
payments are insufficient to meet that salary level over a quarter, employers may make a catch-up
payment during the pay period immediately following the quarter in question. If an employee falls below the minimum salary level for the quarter, then the employee must be reclassified for the period as nonexempt and paid any overtime due for the quarter.
- Changes are effective December 1, 2016
Employers should ensure that they are in compliance by the pay period that includes December 1, 2016.
What has NOT changed?
Although several provisions of the FLSA have changed, a majority have not. Those include the following.
- Duties tests
Standard duties tests for exempt professionals remain the same.
- Timekeeping requirements
No changes have been made to regulations governing how employees are to record or report hours worked. However, if employees are reclassified as nonexempt, they may have to comply with timekeeping rules that have not previously applied to them. So, training may be required.
- Regulations regarding part-time employees
The DOL has not modified its regulations to accommodate workers who perform exempt duties on a parttime basis. Even if an employee only works two days a week, he or she must earn the full minimum salary level of $913 per week in order to be considered exempt.
- Jobs still excluded from the salary level test
The new regulations do not change certain salary level tests for:
- Outside sales. Minimum pay is still not required. However, all sales must be considered “outside.”
- Computer professionals. Computer professionals are still exempt as long as they earn a rate of $27.63 per hour or more.
- Licensed professionals. There is no change to the rules for professional licensed employees such as doctors and lawyers. They are not required to be paid a salary or minimum pay and may work on a fee basis.
- Certain retail employees. There is no change for retail employees paid on a commission under the §7(i) exemption.
- Other FLSA overtime exemptions
No changes have been made to FLSA minimum wage and overtime exemption for certain agricultural employees, employees covered under the Motor Carrier Act, seasonal employees of amusement, or recreational establishments, etc.
Tips for identifying employees who may need to be reclassified
The new FLSA regulations are likely to affect more employees than most employers realize.
- List of roles
Here is a list of roles that should be examined carefully.
- All roles currently designated as exempt and earning less than $913 per week/$47,476 per year
These roles should be examined to ensure they still meet the duties test for exemption. If they do not meet the duties test, they should be reclassified as non-exempt. If they do meet the duties test, then either the salary for the job must be raised to the new threshold (and remain classified as exempt) or the job must be re-classified as non-exempt. This analysis should be applied to both full- and part-time employees, including those part-time employees whose full-time equivalent salary would be above the threshold. Remember, DOL regulations only consider actual salary paid for determining exemptions.
- Employees whose roles and pay have evolved but whose job description and exemption status have not
Now is a good time to examine any roles that may have evolved over the years. Look carefully at all employees currently designated as non-exempt who are paid more than $913 per week/$47,476 per year, but whose duties might meet the EAP exemption test.
- Employees with seniority
When analyzing where employees fit in your company’s salary structure, it is important to consider those who have seniority. Increasing salaries for some to comply with new FLSA regulations may create salary compression issues (when there is only a small difference in pay between employees regardless of their skills or experience) — especially for those who have seniority. It may be necessary to also increase pay for those in this group.
- Analyzing/revising employee classifications: A step-bystep checklist
Employers must identify and analyze employees’ job duties and salaries and determine whether
classification changes must be made in order to comply with the new FLSA regulations. Here is a step-by-step checklist to ensure that you are covering all bases, which include:
- Identify necessary changes;
- Analyze your options;
- Reclassifying employees.
- Increasing pay to maintain EAP exemption.
- Restructuring/updating job descriptions.
- Identify associated costs;
- Transition successfully;
- Communicate the changes;
- Follow up;
- Ensure compliance, and
- Plan for the future.
- Analyze your options
Once you have identified employees who might be affected, analyze which options are available to you and which make the most sense for your organization. According to the DOL, employers may:
- Increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
- Pay an overtime premium of one-and-a-half times the employee’s regular rate of pay for any overtime hours worked;
- Reduce or eliminate overtime hours;
- Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
- Use some combination of these responses.