June 30, 2016
by Ethan R. O’Shea, Esq.
After nearly a year since the Department of Labor (DOL) proposed changes to the overtime pay regulations under the Fair Labor Standards Act (FLSA), on May 18th, 2016, the DOL at long last announced the final rule. To understand the impact of the new rule, a quick review of the current FLSA regulations is needed.
The FLSA requires that most workers, those not exempt from its requirements, be paid a minimum hourly wage and receive overtime pay at the rate of time-and-a-half their hourly rate for all hours worked over 40 in a given week. Certain “white collar” workers are exempt from these requirements, the most common white collar exemptions being the executive, administrative and professional exemptions. To qualify for an exemption and thus be immune from the overtime pay regulations, the white collar employee must be paid on a salary basis, meet the “duties test” of the particular exemption, and earn a minimum salary of at least $455 per week. The minimum salary of $455 per week had not been increased since 2004 until now.
Under the new regulations that become effective on December 1, 2016, the minimum salary threshold has been increased to $913 per week, or $47,476 annually, which salary is at the 40th percentile for full-time salaried workers. For “highly compensated employees” who are subject to only a minimum duties test, the annual compensation has been raised to $134,004. Moreover, the above salary and compensation levels will be readjusted every three years to maintain the minimum salary at the 40th percentile level. Finally, the new rule allows employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the new minimum salary levels.
The final rule does not change the duties test for the white collar exemptions. They continue to be as follows:
Executive Exemption – the employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise, and managing 2 full-time employees.
Administrative Exemption – the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
Professional Exemption – the employee’s primary duty must be to perform work that either requires advanced knowledge in a field of science or learning or that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
The new regulations are estimated to impact 4.2 million workers and employers must determine how to respond in order to remain in compliance. Penalties for a violation of the FLSA include back pay, front pay, liquidated damages and legal fees. Individual business owners, CFOs or other persons responsible for non-payment can be subject to personal liability and even charged criminally. In order to avoid these dire consequences, employers have several options including raising salaries of affected workers, reducing or eliminating overtime for affected workers, reorganizing workloads and/or schedules, or restricting the salary of affected workers to pay overtime yet keep the workers at their current compensation level.
Employers cannot control everything that happens in the workplace, but they can certainly control how they classify and pay their workers. DOL’s new regulations should prompt every employer to evaluate the classification and compensation of their employees.