Overtime for Everyone – New FLSA Exempt Status Requirements
FEDERAL DOL ISSUES FINAL REGULATIONS CHANGING RULES ON EXEMPT STATUS
On May 18, 2016, the federal Department of Labor (DOL) announced their long-awaited changes to the Fair Labor Standards Act (FLSA) regarding the rules for classifying employees as exempt from federal minimum wage and overtime requirements. While the changes include a daunting 50%+ increase in the salary required for an employee to be considered exempt, the good news is that companies are being given until December 1, 2016 to get into compliance. However, the analysis and planning needs to start now as the new rules will mean overtime pay for an additional 4 million workers in the U.S.
Summary of Current Requirements
Under current federal regulations, for “white collar” (Executive, Administrative, and Professional) employees to be considered exempt from overtime and minimum wage, a three prong test must be met. First, the employee must truly be paid on a salaried basis, meaning that the employee must receive a fixed weekly salary for any week in which the person performs any work. Secondly, the employee’s salary level must be no less than the minimum prescribed by federal law – currently fixed at $455 per week ($23,660 per year). Finally, the employee’s job must meet the duties tests under the law, meaning that the actual work performed must meet specific criteria. Of note is that under federal law, if an employee earns a salary of at least $100,000 per year and meets a minimal duties test, that person is considered an exempt Highly Compensated Employee (HCE) without needing to meet the full duties tests.
Several key elements of how an employee is classified as being exempt are changing under the new rules.
Salary Level – The most significant new development is the 50%+ increase in the salary that must be paid to an employee in order to be considered exempt. From $455 per week, the new required level is $913 per week ($47,476 per year). The Obama administration made it very clear that they wanted the vast majority of American workers to be eligible for overtime pay and cite that this salary level is at the 40th percentile of “earnings of full-time salaried workers” in the lowest wage region in the U.S.
Index – For the first time in the history of the FLSA exemption requirements, the required salary level will be subject to automatic increase every three years (originally proposed as annually!) based upon data from the federal Bureau of Labor Statistics. The next increase will be on January 1, 2020.
Salary Basis – Another first is that employers will now be able to use non-discretionary bonuses and incentive payments (including commissions!) to meet up to 10% of the required salary. Note that these incentive payments must be paid at least quarterly in order to qualify and will count towards the salary in the quarter in which they were earned, even if paid in the following quarter. Additionally, the new regulations provide for the employer to be able to meet the salary basis test even if the employee is paid on a daily, hourly, or shift basis, so long as the method of payment will guarantee that the employee wages are at least at the minimum required amount. We caution our clients regarding this last practice given the potential risk and would strongly advise getting legal counsel prior to making the assumption that anything other than a fixed, weekly salary will meet the exemption requirements.
Highly Compensated Employees – The new threshold for meeting the highly compensated exemption has been increased from $100,000 annually to $134,004 – fixed at what the DOL is referring to as the 90th percentile of “earnings of full-time salaried workers” nationally. Of note is that this requirement will also be subject to the automatic index but there is a provision for making a “catch up” payment to an HCE as long as it is done within one month after the end of the year. To claim the HCE exemption, employers will continue to be required to pay the standard weekly salary level of $913 per week but may make up with additional compensation in the form of commissions, non-discretionary bonuses, and other nondiscriminatory compensation. Because employers may fulfill almost two-thirds of the HCE total annual compensation requirement with this broader group of types of incentive compensation, the DOL determined that it would not be appropriate to permit employers to also use non-discretionary bonuses and incentive payments to satisfy the standard salary amount. Note that failure to qualify as exempt as an HCE does not preclude the employee from being found exempt under the regular rules.
Duties Test – While the proposed regulations seemed to indicate that the DOL was considering changes to the duties tests for white collar exemptions, the final published regs did not make any changes to the existing rules. While this is one less complication to worry about, many employers were hoping for updated guidelines that better fit the realities of our modern-day business environment. The old “production vs. administrative worker” dichotomy is no longer easily translatable in an era where businesses are more likely selling knowledge and information as opposed to manufacturing widgets.
Please note that the actual final regulations will be published on May 23, 2016. Additionally, there is talk in Congress about legislation that might stop these new regulations from going into effect and also the possibility of lawsuits being filed to challenge their implementation. As such, we advise that our clients conduct a thorough analysis of how to get into compliance now, but wait until we are closer to the effective date before implementing what could be significant pay increases or major position reclassifications. Vantaggio will continue to monitor this complex and rapidly changing landscape.
To review the current unpublished version of the new regulations, click here. For additional information from the DOL, see their Q&A.
What this Means in California
For California employers, the topic is more complex. First of all, as California’s exempt regulations have historically been more difficult to meet, most employers in this state have somewhat ignored the federal regulations. Now, we must pay attention to both sets of laws.
Salary Level – As a reminder, California requires that overtime be paid whenever an employee works more than 8 hours in a day or over 40 in the workweek and during the first 8 hours of work on the 7th consecutive day of work in the workweek. It also requires double-time for any hours worked in excess of 12 in a day or in excess of 8 on the 7th consecutive day of work in the workweek. Further, CA law mandates meal and rest periods. To be exempt under CA law, a white collar exempt employee must be paid at least twice the current state minimum wage. At the current rate of $10 per hour, CA employees must currently be paid no less than the equivalent of $41,600 per year to be exempt. In order to remain exempt from both federal and state overtime requirements, effective December 1, 2016, CA employers will now need to align with the new federal salary requirements. Failure to do so might create a challenging class of employees who are exempt from CA’s daily overtime, double-time, and break requirements but who would still be eligible for federal overtime. Keeping this type of “in between” employees’ pay compliant may serve to be a huge challenge for employers and their payroll and timekeeping systems.
Index – Governor Brown signed a new law into effect on April 4, 2016 that provides for an annual index of California’s minimum wage which goes into effect on January 1, 2017 for companies with more than 25 employees, and January 1, 2018 for companies with 25 and fewer employees. Beginning in 2024, the CA minimum wage will increase annually by 3.5% based on the US Consumer price index. What this means is that effective December 2, 2016, all CA employers will need to meet the new federal salary level of $47,476. However, in 2019, larger employers will once again need to align with the CA requirement which will have surpassed the federal salary level. After that, employers will need to keep a keen eye on both rules that will index at different rates.
Salary Basis – Bonuses and Incentive – As California’s exempt rules do not allow for the use of incentive payments to meet the minimum required salary, special care must be taken to ensure that as the CA minimum wage increases each year, if an employer is using incentives to meet the new federal requirement, the actual salary paid to the employee must still not fall below the CA requirement. For example, effective December 1, 2016 an employer could pay an employee $42,728 with the additional amount being made up by quarterly incentives. However, on January 1, 2017, when CA’s minimum wage goes to $10.50 per hour, the exempt salary requirement will then be $43,690 – in excess of the salary paid to meet the federal exemption. If this is giving anyone an HR migraine, we understand!
Highly Compensated Employees – California does not recognize the federal HCE exemption. As such, in order to be exempt from California’s minimum wage and overtime requirements, employees must still meet the full duties tests for their positions.
Duties Tests – Although neither has changed with these new regulations and laws, as a reminder, California follows the federal white collar duties tests in some places but diverges from them significantly in others. As a general rule, it is more difficult for an employee to meet the duties tests under CA law than federal.
Checklist for Employers
Audit your current exempt employees to ensure they meet the current salary and duties tests;
Educate your team about the white collar and other alternative exemption rules;
Identify which employees may need to have a pay increase to remain exempt;
Analyze the financial impact to your organization of the potential pay increases;
Review your current incentive, bonus, and commission plans to see if they will help meet the new federal requirements;
Reclassify any employees who are either currently misclassified or who will not be getting a pay increase to allow them to remain exempt after December 1, 2016. Be cautious as there are legal requirements about how to convert a salaried employee into an hourly employee at the correct hourly rate of pay;
Develop a communication strategy to announce and implement any changes;
Seek Assistance from an expert if you need help in any of these areas.
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Call or email us for help getting into compliance with exempt classifications or any other HR matter!