On May 18, the U.S. Department of Labor (DOL) introduced new rules for classifying white collar workers as exempt from overtime under the Executive, Administrative, and Professional (EAP) exemptions found in the Fair Labor Standards Act (FLSA).
The final rule takes effect Dec. 1, 2016, and incorporates changes to the 2015 Notice of Proposed Rulemaking (NPRM) that are viewed by most employers as less harmful but, nevertheless, a hardship that will have a significant impact on their businesses.
In addition to increasing the minimum threshold salary level required to classify a worker as exempt from overtime under one of the EAP exemptions, the final rule includes a provision to automatically increase the minimum salary threshold level every three years. As a small concession, the final rule permits employers to offset the minimum salary guarantee with a small amount of earnings from bonuses or commissions.
According to the DOL, the current minimum salary level of $23,600 is lower than the poverty threshold for a family of four and does not establish a clear line of demarcation between exempt and nonexempt employees.
The DOL released several guidance documents for employers. View them here: dol.gov/whd/overtime/final2016
1. What exactly is changing on Dec. 1, 2016?
Several things. Before explaining the precise changes in the final rule, it is important to understand which salaried employees are affected.
The FLSA requires that all covered employees receive at least the federal minimum wage for every hour worked and overtime at one-and-one-half their regular rate of pay for hours worked beyond 40* in a workweek. Exceptions to minimum wage and overtime requirements exist in a number of specific exemptions found in the FLSA.
The final rule pertains only to four of the five exemptions found in the FLSA. These exemptions are for employees employed as bona fide executive, administrative, professional, computer and outside sales employees. Collectively, these exemptions are referred to as “white collar” exemptions and the first three (executive, administrative and professional) are referred to as the “EAP” exemptions. Although it is one of the white collar exemptions, the outside sales exemption is not affected by the final rule because, unlike the others, it does not require the payment of a guaranteed salary.
To qualify for an EAP exemption, three tests must be met:
- The employee must be paid a guaranteed salary that is not subject to reductions based on the quantity or quality of work.
- The amount of the salary paid must meet a minimum specified amount.
- The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations, also called the “duties test.”
The final rule updates the salary basis and salary level tests. Effective Dec. 1, the changes are as follows:
- The new minimum salary level for EAP exempt employees is $913 per week, or $47,476 annualized (a 100.7-percent increase over the current rate of $455 per week, or $23,660 per year).
- The new minimum salary level for highly compensated employees (HCEs) is $134,004 annualized (a 34-percent increase over the current rate of $100,000).
- Minimum threshold salary amounts will be automatically updated every three years using Census Region data. Future automatic updates to salary thresholds will begin on Jan. 1, 2020.
- Employers are permitted to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new minimum salary amount for non-HCEs (approximately $91 per week), as long as the bonus or incentive payment is paid on a quarterly or more frequent basis.
2. I own a small business. Is my business is covered by this new rule?
There are no special exceptions in the FLSA for small businesses (per se) or for nonprofit agencies. A business enterprise or its employees can be covered under the FLSA and, therefore, subject to the new overtime rule. Read more here: bit.ly/DOL_SmallBusiness
3. We don't have any employees who earn less than the new threshold salary amount. Is there anything else we should consider?
You should determine if you have any employees in positions classified as exempt from overtime under one of the white collar exemptions who do not meet the “duties tests” and correct the misclassification now. Inadvertent misclassification can occur when an employer pays a guaranteed salary to a worker and is unaware that specific job duties tests must be met, or when an employer agrees to pay an employee by way of a salary simply to satisfy a request from the employee.
Although it’s a common misconception, job titles never determine the exempt status for a position, nor does the payment of a salary or a particular salary amount. Read more here: bit.ly/DOL_AboveThreshold
4. What are the tests for an overtime exemption?
To qualify for a white collar overtime exemption, in addition to receiving the guaranteed minimum salary amount, an employee must meet the duties tests for the exemption being claimed. The final rule did not change or revise the duties tests for any of the white collar exemptions. You can obtain a summary of these tests here: bit.ly/EAP_Exemptions and read more about the exemptions here: bit.ly/Exemption_Tests
5. How does the new bonus and commission provision help meet the salary level requirement?
It does by allowing employers to offset a portion of the salary with bonus and commission earnings. But the amount is insignificant. Effective Dec. 1, for the first time, the DOL will allow nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement if the payment is made on a quarterly or more frequent basis. Read more here: bit.ly/BonusProvision
6. What surprises are in the final rule?
There are two. The first has to do with the DOL’s purpose and intent for the changes, and the second has to do with recordkeeping requirements for positions classified as nonexempt. Read more here: bit.ly/Purpose_Intent
7. Does the new overtime rule affect state wage and hour regulations?
No. The final rule pertains to the FLSA, the federal law that addresses minimum wage and overtime obligations for covered enterprises and employees. The FLSA is enforced by the DOL, a federal government agency. Many states have their own departments of labor that enforce state regulations. Oftentimes, these regulations are more stringent than the federal regulations. In fact, many state regulations exist to fill voids in coverage under the federal law.
Employers should consider applicable state regulations when evaluating the options for pay plan changes that are necessary to comply with the DOL final rule. In some cases, a state regulation will prohibit an employer from using a particular pay plan, including those that the DOL has suggested or that are in use by employers in other states.
For example, the fluctuating workweek pay plan for nonexempt positions is outlined in FLSA implementing regulations. However, it is not permitted for use in some states. This pay plan, considered to be a viable alternative when reclassifying positions under the new overtime rule, involves the payment of a guaranteed salary to eligible nonexempt employees and half-time (vs. time-and-one-half) for all hours worked over 40* in a workweek.
Likewise, the overtime “exception” for retail establishments that is commonly referred to as the “7(i) pay plan” is not permitted by all state wage and hour agencies.
8. What are the options for changing pay plans and how do I know which one is best to use?
There are several. The options for changing pay plans will depend on the affected employee’s specific circumstances. Generally speaking, salaried workers will fall into one of three categories. Read more here: bit.ly/ChangePayPlans
9. Is there a chance the overtime rule could be reversed?
Yes, but the chance of this occurring is remote. By issuing the final rule in May, President Barack Obama seems to have spared it from revocation under the Congressional Review Act. With the loss of this Act as a tool for overturning the rule, few good options remain.
From a legislative perspective, currently there are House and Senate versions of a bill in Congress that would block implementation of the final rule and require the DOL to conduct a new and comprehensive economic analysis of the impact of the overtime rule on small businesses, nonprofits and public employers. In the event the bill passes in both chambers, President Obama will most certainly veto it and supporters are not likely to garner the two-thirds supermajority vote required to override the veto.
Assuming the final rule becomes effective on Dec. 1, millions of employees will be subject to new pay rates, pay plans and/or pay classifications. Should the final rule eventually be reversed, modified or revoked by a new president or congress, it will be extremely difficult — and likely too late — to restore salaries to former levels and reverse pay practices perceived as positive by employees.
In light of the uncertainty surrounding the current political landscape, employers would be wise to hold off on increasing salary levels until Dec. 1 for employees who meet the duties tests but not the salary level test.
10. Should we make changes now or wait until Dec. 1?
It depends. If you have employees who are classified as salaried exempt but who do not meet the duties tests under one of the EAP exemptions, we recommend that you make the necessary changes now. This will ensure compliance with FLSA requirements that are unchanged by the final rule. The window of opportunity between now and Dec. 1 provides employers with a chance to correct pay plans for misclassified employees without drawing unnecessary attention to inadvertent errors that can result in the required payment of back wages.
On the other hand, if you have employees who meet the duties tests but not the minimum salary threshold level, in consideration of increasing costs and the uncertainty surrounding the Presidential election, we recommend that you wait until the latest possible date (no later than Dec. 1) to make pay-related changes.
*Some states require payment of overtime if employees reach a daily threshold. In California, employers must pay overtime after 8 hours per day and double time after 12 hours per day to nonagricultural employees. In Alaska, Nevada and Puerto Rico, employers must pay overtime after 8 hours per day. In Colorado, employers must pay overtime after 12 hours per day. If these daily thresholds are not met but the employee still works over 40 hours per week, overtime must be paid after 40 hours.
This information was used with permission, and was originally published in the Seawright & Associates May 31, 2016, Client E-Bulletin.