On May 23 2016, the U.S. Department of Labor (DOL) published its final revisions to the overtime compensation regulations under the Fair Labor Standards Act (FLSA). The Final Rule makes changes to the regulations pertaining to the exemption for salaried executive, administrative, and professional employees (commonly known as the "white-collar" exemption). DOL Final Rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 81 Fed. Reg. 32,391 (May 23, 2016). Among other things, the Final Rule raises the standard salary threshold for the exemption from $455 a week ($23,660 a year) to $913 a week ($47,476 a year) for full-time employees and provides for automatic adjustments every three years based on the weekly earnings of the 40th percentile of full-time salaried workers in the lowest-wage Census region (currently the South). The Final Rule also increases the "highly compensated employee" (HCE) annual salary threshold from $100,000 to $134,004 for full-time employees and provides for three-year automatic adjustments based on the annualized weekly earnings of the 90th percentile of full-time salaried employees nationally. The Final Rule takes effect on December 1, 2016.
Overtime pay requirements were first put into place in 1938 by the FLSA, which established the general standard that employees must be paid time-and-a-half for any hours worked over 40 in a week. In general, all hourly employees are entitled to overtime pay, and salaried employees also are entitled to overtime pay unless they (1) earn more than a salary threshold set by the DOL and (2) meet a test demonstrating that they perform primarily executive, administrative, or professional duties. A limited number of professions (such as teachers, doctors, and lawyers) are ineligible for overtime pay or are subject to special provisions.
Standard Salary Employees
Generally, for the white-collar exemption to apply to non-HCE employees, three criteria must be met:
- The employee must be paid on a salary basis not subject to reduction based on quality or quantity of work ("salary basis test") rather than, for example, on an hourly basis;
- The employee’s salary must meet or exceed the threshold level, which, as of December 1, 2016, will be $913 per week ($47,476 a year) for full-time employment ("salary level test"); and
- The employee’s primary job duties must involve the kind of work associated with exempt executive, administrative, or professional employees ("standard duties test").
Regarding the second criterion, the Final Rule permits up to 10 percent of the salary threshold to be met by nondiscretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. According to the DOL, this new provision recognizes the importance of these forms of pay to many employers’ compensation arrangements, particularly for managerial employees. Concerning the third criterion, employers will continue to use the existing "duties test" to determine whether an employee whose salary level meets or exceeds the threshold is entitled to overtime pay. The DOL anticipates that, under the new Final Rule, application of the test will be necessary in far fewer cases because an employee’s entitlement to overtime pay will be clear simply from the employee’s salary level. DOL, Overview and Summary of Final Rule.
Highly Compensated Employees (HCEs)
As part of its 2004 revision of the white-collar exemption regulations, the DOL created special exemption criteria for salaried HCEs that utilize a minimal "duties test" for employees earning $100,000 or more in total annual compensation. The high salary threshold was intended to make it easier for employers to identify overtime-eligible HCEs, as employees earning at, or above, the threshold are likely to perform the types of job duties that exempt them from overtime requirements. The DOL continues to believe that an HCE test for exemption is an appropriate method of determining whether HCEs qualify as executive, administrative, or professional employees. Final Rule, supra, 81 Fed. Reg. at 32,427.
As noted above, the Final Rule increases the HCE total annual compensation level to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally ($134,004 based on the fourth quarter of 2015), with automatic three-year adjustments. However, the Final Rule retains the 2004 requirement that HCEs also receive at least the full standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses or incentive pay. The DOL notes that employers are already permitted to credit such payments toward the portion of the HCE total compensation requirement in excess of the standard salary level; therefore, allowing such payments to also satisfy a portion of an HCE’s standard salary level would be inappropriate. Id. at 32,429. Lastly, as noted above, the Final Rule retains the HCE minimal duties test from 2004.
The DOL has been aggressively pursuing overtime violations. In FY2015, the Wage and Hour Division (WHD) brought enforcement actions related to overtime violations in over 10,000 cases. In 78% of these enforcement actions, employers were required to pay back wages to employees.
Noncompliance with FLSA overtime requirements can also result in severe penalties. For example, a 2014 consent judgment obtained by DOL against a New York restaurant chain resulted in an award of $956,482 in back wages and liquidated damages to 85 workers. The chain of seven restaurants paid additional amounts in interest and civil penalties. (DOL Release Number: 14-964-NEW/BOS 2014-114.)
To implement the new rule, employers have several options. If you need assistance in determining the best option for your client, please contact our Human Resources/Employment Law Consulting team at http://www.nlrg.com/our-services/human-resources-research-and-consulting-group