It has taken the Department of Labor (DOL) almost two years to release the final regulations requested by President Obama. The DOL press release announcing the final regulations indicates:
“This long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.”
At a press conference on March 13, 2014, President Obama issued a Presidential Memorandum directing the DOL to modernize and update the regulations which define the white collar exemption from overtime pay. At that time, he expressed his concern.
“The salary level test is supposed to help identify salaried workers who are entitled to overtime pay when they work long hours. The current salary level is outdated and no longer does its job of helping to separate salaried white collar employees who should get overtime pay for working extra hours from those who should be exempt.”
A case can be made for the wage amount used to determine exemption from OT is out of date and inflation has caused it to be irrelevant. A blog post by the DOL states:
“For decades, the salary threshold under which all white-collar, salaried workers qualify for overtime has failed to keep up with the rising cost of living. In 1975, 62% of full-time salaried workers were eligible for overtime protection based on their pay. Today, only 7% are eligible under the outdated salary level. The current salary level is so low that it does not effectively identify which white-collar workers are entitled to overtime protection. That is an economy out of balance.
“So we’re fixing it. We have more than doubled the salary threshold − lifting it from $23,660 to $47,476 per year. That means some 35% of full-time salaried workers, based on their pay, will now be eligible for overtime.”
https://blog.dol.gov/2016/05/19/middle-class-work-deserves-middle-class-wages/ In another blog post by the DOL, they project who they believe will be the primary beneficiaries of the new regulations:
“The updates will impact 4.2 million workers who will either gain new overtime protections or get a raise to the new salary threshold. So who are these workers?
“More than half − 56% − are women, which translates into 2.4 million women either gaining overtime protections or getting a raise to the new threshold as a result of the rule. We also find that more than half – 53% − of affected workers have at least a four-year college degree, and more than 3 in 5 (61%) are age 35 or older. And 1.5 million are parents of children under 18, which translates into 2.5 million children seeing at least one parent gain overtime protections or get a raise to the new threshold.”
The final regulations were released by DOL on May 18, 2016 and published in the Federal Registry shortly thereafter. It is expected initially to extend overtime pay to over 4.2 million workers. Further, DOL indicates the regulations change “strengthen existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers whose entitlement to overtime pay will no longer rely on the application of the duties test.” The effective date for implementation is December 1, 2016.
The essential elements of the new regulations are:
1. Sets the annual salary level of $47,476 for Executive, Administrative and Professional workers to establish they will be exempt from the overtime (OT) compensation;
2. Sets the annual salary level of $134,004 for highly compensated employees (HCE) to establish they will be exempt from the overtime (OT) compensation;
3. For the first time ever, establishes a mechanism to automatically revise these compensation levels every three years beginning January 1, 2020 in order to maintain and ensure the salary levels continue to increase as the average compensation increases (DOL indicates it will publish all updated salary amounts in the Federal Register at least 150 days before their effective date, and will post them on the Wage and Hour Division’s website); and
4. Another new element is the regulations allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the newly established salary level.
The DOL published their Notice of Proposed Rulemaking (NPRM) for comment last summer on July 6, 2015. DOL received over 270,000 comments. Several elements of the exposure draft were modified based on the comments received.
Some experts in the employment law field have observed that many of them were expecting a short time period between the final ruling and the implementation date. As you will note, DOL has given employers just over a six-month period to implement the revised regulations and modify their pay structure to implement it. There is already some speculation the regulations may become a political issue in Congress and potentially the November elections. Further, some speculate the fourth item above which mandates an automatic adjustment to the salary levels may be challenged in court.
Briefly this is how the salary level was set and how it will be revised every three years. The annual salary of $47,476 is based on the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region (which is currently the South). The current salary of $23,660 has not been adjusted since 2004. This salary level is one item DOL modified in the final regulations based on the public comments. Another item which was modified in the final regulations was this salary level would be adjusted each three years versus annually.
The adjustment of the annual salary amount for this exemption will mostly likely jump significantly again in 2020. This is because the method specified to determine the salary amount is the average of the employees classified as salaried employees. Therefore, if everyone who is eligible to be exempt is paid $47,476 or more, then the average will be higher than this minimum amount. After the recalculation in 2020, we can expect the adjusted salary amount to stabilize and fluctuate in relationship to market influences. Future automatic updates will take effect on January 1 of 2023, 2026, etc.
However, employers should begin evaluating how these new regulations impact their compensation structure and what additional record keeping may be needed.
As noted on the DOL website and in the Fair Labor Standards Act (FLSA or Act):
“Since 1940, the Department’s regulations have generally required each of three tests to be met for the FLSA’s executive, administrative, and professional (EAP) exemption to apply:
(1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (salary basis test);
(2) The amount of salary paid must meet a minimum specified amount (salary level test); and
(3) The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (duties test).”
Items #1 and #3 are essentially unchanged from the current regulations.
1. For item #1 above for a person to be exempt from the OT pay, they must be paid on a salary basis which would be a predetermined fixed amount. However, employers need to understand simply paying a person a fixed salary does not automatically make them exempt from being paid OT. This is a common misconception I find with employers.
2. For item #3 above, the new regulations do not change the duties test in the current law and regulations. See FSLA website: https://www.dol.gov/whd/overtime/fs17a_overview.htm. DOL is not making any changes to the standard duties test. The Duties Test includes:
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent;
• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers;
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
• The employee must have advanced knowledge and must be in a field of science or learning; and
• The employee’s advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
See the FLSA site for more examples and details of the duties test.
The DOL in their May 18 press release offers a justification of the new regulations:
“The standard salary level set in this Final Rule addresses our conclusion that the salary level set in 2004 was too low given the Department’s elimination of the more rigorous long duties test. For many decades the long duties test − which limited the amount of time an exempt employee could spend on nonexempt duties and was paired with a lower salary level − existed in tandem with a short duties test − which did not contain a specific limit on the amount of nonexempt work and was paired with a salary level that was approximately 130 to 180 percent of the long test salary level. In 2004, the long and short duties tests were eliminated and the new standard duties test was created based on the short duties test and was paired with a salary test based on the long test.
“The effect of the 2004 Final Rule’s pairing of a standard duties test based on the short duties test (for higher paid employees) with a salary test based on the long test (for lower paid employees) was to exempt from overtime many lower paid workers who performed few EAP duties and whose work was otherwise indistinguishable from their overtime-eligible colleagues. This has resulted in the inappropriate classification of employees as EAP exempt who pass the standard duties test but would have failed the long duties test.
“The Final Rule’s salary level represents the most appropriate line of demarcation between overtime-protected employees and employees who may be EAP exempt and works appropriately with the current duties test, which does not limit non-EAP work.”
The DOL asserts “With the new, higher threshold, 8.9 million overtime-eligible salaried workers − and their employers − will be able to determine more easily that they should be receiving overtime pay. Because their salaries are below the new threshold, their employers will no longer have to figure out whether they pass the ‘duties test,’ and they will no longer have to wonder if that test has been applied appropriately. This will simplify application of the rules and provide a bright line that protects the set of workers our workplace laws intended to protect.”
DOL further asserts in their announcement the benefits will:
1. Put more money into the pockets of many middle class workers or give them more free time.
2. Prevent a future erosion of overtime protections and ensure greater predictability.
3. Strengthen overtime protection for salaried workers already entitled to overtime and provide greater clarity for workers and employers.
4. Improve work-life balance.
5. Increase employment by spreading work.
6. Improve worker’s health.
7. Increase productivity.
Generally, employers that have an annual gross volume of sales of $500,000 or more are covered by the FLSA. In addition, employees of certain entities are covered by the FLSA regardless of the amount of gross volume of sales. These entities include: hospitals; businesses providing medical or nursing care for residents; schools (whether operated for profit or not for profit); and public agencies. Furthermore, if an employer is engaged in “interstate commerce” they become subject to FLSA.
For more information on enterprise and individual coverage under the FLSA, see Fact Sheet 14: Coverage Under the Fair Labor Standards Act (FLSA). https://www.dol.gov/whd/regs/compliance/whdfs14.pdf
Employees are presumed to be subject to the FLSA, which in most instances, would require they be paid hourly, and if they work more than 40 hours in the work week they should be paid one and one-half of their regular pay rate (commonly called their overtime rate).
What about compensatory time (compensatory time off)? Generally, the use of compensatory time is limited to a public agency that is a state, a political subdivision of a state, or an interstate governmental agency, under specific circumstances. Private companies are not allowed to use compensatory time to fulfill their overtime obligation and are therefore generally required to pay overtime-eligible employees an overtime premium for hours over 40 in a workweek. Compensatory time will only reduce the employer’s OT obligation if the time off is within the same workweek. For example, if an employer’s workweek is Sunday through Saturday. If the employee has worked 40 hours by Wednesday night, then the employee would be given compensatory time off for the rest of that workweek. In other words, the only way compensatory time will work is that the employee is limited to only working 40 hours and they would therefore only be paid for the 40 hours worked.
Simply paying an employee a fixed amount per pay period (a fixed salary) does not cause the employee to be exempt from OT. Nor does having a title make an employee exempt from OT.
Employers will need to implement a system to know how many hours non-exempt employees are working so they will be able to properly compensate them when they have overtime hours. See Fact Sheet 21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA). https://www.dol.gov/whd/regs/compliance/whdfs21.pdf
Also see Fact Sheet 22: Hours Worked Under the FLSA. https://www.dol.gov/whd/regs/compliance/whdfs22.pdf
See Fact Sheet 23: Overtime Pay Requirements of FLSA https://www.dol.gov/whd/regs/compliance/whdfs23.pdf
If the employer is in a state which has a higher standard for paying OT, then the higher standard will apply.
The new regulations allow for nondiscretionary bonuses and incentive payments (including commissions) to be part of the compensation to satisfy the salary test for an exempt employee. However, it should be noted that the bonuses must be paid at least quarterly and in fact the employee must be paid enough including the bonuses to meet the minimum compensation threshold of $47,476. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain their exempt status DOL permits a “catch-up” payment at the end of each quarter. The employer has one pay period to make up for the shortfall (up to 10% of the standard salary level for the preceding 13-week period).
Employers can comply with the new rule in several different ways:
• Pay time-and-a-half for overtime work.
• Raise employees’ salaries above the new threshold.
• Limit employees’ hours to 40 per week.
• Continue to pay the employee a salary and pay overtime in addition when they work more than 40 hours in a workweek.
• Evaluate the workload and realign the hours to keep employees below 40 hours.
• Some combination of the above.
It should be noted this new regulation is specific to the “white collar” exemption. There are many other provisions of FLSA which continue to govern other employees which determine how they are compensated. Furthermore, DOL issued some specific guidance relative to this regulation as follows:
1. Guidance for Higher Education Institutions. https://www.dol.gov/whd/overtime/final2016/highered-guidance.pdf
2. Guidance for Private Employers https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf
3. Guidance for Non-Profit Organizations https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf
4. Small Entity Compliance Guide to the FLSA “White Collar Exemptions” https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf
5. Non-Enforcement policy for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. https://www.dol.gov/whd/overtime/final2016/nonenforcementpolicy.htm
6. A Questions and Answer page https://www.dol.gov/whd/overtime/final2016/faq.htm
7. The following is a link the Federal Register where the entire 500 plus pages are posted. https://www.federalregister.gov/articles/2016/05/23/2016-11754/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and
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