06/01/2016

Client Alert

Written by: Felicity S. Hanks, Esq.

After almost two years in the works, the Department of Labor has finally released its Final Rule addressing overtime exemptions under the Fair Labor Standards Act (“FLSA”). The Final Rule, officially published on May 23, 2016, governs new standards for the application of the white collar exemptions to FLSA overtime rules, which apply primarily to employees performing executive, administrative, and professional functions for their employer. The language of the Final Rule, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” is published in the Federal Register and available at https://www.federalregister.gov/articles/2016/05/23/2016-11754/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and. The Final Rule becomes effective December 1, 2016, thus providing employers with approximately six months to get their proverbial ducks in a row.

By way of brief background, the FLSA requires that employees are entitled to overtime pay (time and one-half) for all time worked in excess of forty (40) hours per week.  The FLSA includes several exemptions which alleviate employees performing certain duties from receiving overtime pay.  Exemptions for employees performing qualifying executive, administrative, and professional job duties are typically referred to as the “white collar exemptions.” Federal law governs what constitutes sufficient duties to fall within one of these exemption categories and sets forth specific, multi-factor tests containing performance requirements that must be met in order for the employee to be considered exempt.  Under the existing law, if an employee’s primary job duties fit into one of these exemption categories and they are paid on a salary basis earning a salary of at least $455/week ($23,660 annualized), their employer is not required to pay them overtime wages for hours exceeding forty (40) hours per week.  

The Final Rule changes a few provisions under the law, but this Alert will focus on the most significant changes, which are related to minimum salary levels. Under the Final Rule, the minimum salary level required for an employee to be considered exempt from the FLSA overtime provisions increases from $455/week ($23,660 annually for a full-year worker) to $913/week ($47,476 annually).  The Department of Labor tethered the minimum salary level to equal the 40^th percentile of earnings of full-time salaried workers from the lowest-wage Census Region.  Relevant to the increase in salary level, starting in 2020, the minimum salary level will increase automatically every three years consistent with that statistic. Importantly, the Department clarified that bonuses and incentive payments can be applied to satisfy up to ten percent of the new salary level.

The salary level increase has been the most concerning and most awaited provision of the final rule.  Although the Final Rule included a minimum salary level slightly less than the level initially proposed by the Department, the salary level has doubled from the prior rule.  Many employees who have been treated by their employers as exempt under the current rules may be  in danger of losing their exempt classification due to salary level.  Employees who do not earn a salary of $913/week ($47,476 annually) will be entitled to overtime pay when the Final Rule becomes effective. 

The other key salary change under the Final Rule is to the salary level for the Highly Compensated Employee (“HCE”) exemption.  Under the present rule, an employee is considered exempt from overtime provisions if s/he earns total annual compensation of $100,000.00 or more (including at least $455/week paid on a salary basis), performs primary duties of office or non-manual work, and customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.  The HCE rule recognizes that if an employee earns a high salary they only need to meet any minimum duty under the white collar exemptions in order to render them ineligible for overtime pay. Where a highly paid employee can satisfy the full duties tests they will be exempt anyway, so the HCE exemption essentially provides a short cut permitting employers to satisfy a lesser standard to uphold an exemption.  Under the Final Rule, the total annual compensation requirement for a HCE is increased to $134,004.00, while the minimal duties tests remain the same.  While this rule change may affect fewer employees overall than the standard salary increase described above, it is important to mention as under the new rule, if an employee’s duties do not satisfy the full statutory tests, they may be entitled to overtime, even though they may make a substantial wage.  It is not until the employee earns $134,004.00 that the employer can rely on the shortened duties test as grounds for classifying the employee as exempt.    

So what should an employer do now? 

Many employers have been anticipating the issuance of the Final Rule, so while it may come as a disappointment; it should come as no surprise.  However, if an employer has not already taken action in anticipating the Final Rule, it should not wait any longer to evaluate whether it employs workers who are presently considered exempt, but would not be considered exempt under the Final Rule.  As the Department did not revise the duties tests for determining whether the primary duties that an employee performs place them within a white collar exemption, so the key inquiries are related to salary: Are there exempt employees making less than the new salary level of $913/week ($47,476 annually); and are there workers earning between $100,000 and $134,004 whose exempt status is reliant on satisfying the minimum duties test?   If the answers to these questions are “yes” then the employer must take action to comply with the Final Rule.

The Final Rule does not require that employees falling below the salary level be transferred to hourly status.  Rather, the Final Rule would require that those employees get paid overtime for qualifying hours.  If an employer has employees that almost never work more than 40 hours/week, but make less than $47,476/year, it may suffice to leave those employees pay structure as it stands, but insure that there is a mechanism to track whether they do work more than 40 hours so that they can be paid their overtime rate for that time.  In some instances where employees regularly work more than 40 hours/week it may be simpler and more cost effective for the employer to increase the employee’s salary to meet the new standard level.  In others, employers may review their employees’ exempt statuses completely and use the Final Rule change as a spring board for reclassifying employees, restructuring offices, or re-balancing workloads so that employees do not work more than 40 hours/week. With respect to HCE’s, an employer should re-evaluate and assess whether the employee’s duties would render them exempt under the full white collar exemption tests.  If not, the employer must similarly determine a proper course of action to ensure its compliance with the Final Rule.  We recommend that all employers take note of the Final Rule and promptly evaluate whether their workforce will be affected by the salary level increases. 

This article is for informational purposes only and does not constitute legal advice or a legal opinion.  Affected employers should seek legal guidance and advice in reviewing their obligations under the Final Rule.  Hill Wallack LLP’s Labor and Employment attorneys have vast experience in counseling employers on wage and hour obligations and are available to discuss your employees and wage and hour compliance.