June 22, 2016
The United States Department of Labor (the “DOL”) recently issued an updated rule under the Fair Labor Standards Act (the “FLSA”) that will have a tremendous impact on employers and employees across the country. For information on which employers and employees are covered by the FLSA, click here.
The FLSA generally obligates employers to pay their employees at least minimum wage, and, with respect to employees who work over 40 hours in a single week, overtime payment. Employers do not have to pay minimum wage and overtime payment, however, to employees who fall within at least one of the several categories of employees who are exempt from the minimum wage and overtime requirements under the FLSA (“exempt employees”). For information on several such categories, please click here.
The updated rule, which will take effect as of December 1, 2016, changes the standards used to determine whether employees in two of those categories, the so-called “white collar workers” and “highly compensated employees,” are entitled to receive overtime payments under the FLSA. Once the updated rule goes into effect on December 1, 2016, many previously exempt employees will become non-exempt employees who are newly entitled to receive overtime payments under the FLSA unless their employers takes affirmative steps to either maintain their exempt status or avoid overtime situations.
Without some intervening action by their employers, in the first year alone after the updated rule becomes effective, 4.2 million currently exempt “white collar workers” and 65,000 currently exempt “highly compensated employees” are expected to become non-exempt and therefore newly entitled to overtime payment, according to estimates provided by the DOL. When overtime payment is required, for each hour worked in excess of 40 hours per week, a non-exempt employee generally must be paid at a rate that is one and half times the employee’s normal hourly rate. (For more information on the calculation of overtime payments, click here.) Thus, the impact of the updated rule is potentially enormous.
With advance planning, however, there are some measures that can be taken by employers to mitigate and manage the impact before the updated rule takes effect.
For an employer to claim that a white collar employee is exempt from the right to receive overtime under the FLSA, under the current rule, the white collar employee generally must: (i) be paid a fixed and predetermined salary that is not subject to reduction due to variations in the quality or quantity of work performed (the “Salary Basis Test”); (ii) primarily perform executive, administrative or professional duties, each as defined in the DOL’s regulations (the “Duties Test”), as discussed at this link; and (iii) earn a salary of no less than $455 per week (or $23,660 for a full-year worker) (the “Salary Level Test”).
The updated rule does not change the Salary Basis Test or the Duties Test, but as of December 1, 2016, the Salary Level Test will change from $455 per week to $913 per week (the equivalent of $47,476 annually for a full-year worker). Accordingly, many workers who are currently exempt from the FLSA’s overtime pay requirements and earn $455 or more per week but less than $913 per week will become eligible for overtime pay as of December 1, 2016 unless their salaries are increased to meet the new Salary Level Test.
The updated rule also changes the standards for determining whether certain highly compensated employees are exempt employees. To be an exempt employee in this category, under the current rule an employee must earn more than $100,000 per year (of which at least $455 per week is paid on a salary basis) and satisfy at least one of the requirements under the Duties Test for executive, administrative, or professional employees. As of December 1, 2016, however, that $100,000 earnings threshold will be raised to $134,004.
Additionally, the updated rule allows employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
In addition to the employer’s obligation under the FLSA to pay non-exempt employees overtime payments, employers of non-exempt employees are also responsible for tracking their non-exempt employees’ hours in regard to overtime. For more information on record-keeping obligations under the FLSA, click here.
In sum, the impact of the updated rule taking effect on December 1, 2016 is huge, with millions of previously-exempt employees becoming entitled to overtime payments at one and half times their usual hourly rate — and the potential consequences on employers who do not comply with the updated rule are significant. Accordingly, employers who are covered by the FLSA should carefully review the classification of their currently exempt employees and determine who will need a salary increase to remain exempt — or to be re-classified as non-exempt as of December 1 — and consider the available options and strategies to mitigate the impact of the updated rule on their businesses.
Many states have laws requiring that employers provide advance notification to their employees concerning re-classification or other changes in compensation, and it will take some time for employers to conduct their internal review and develop and implement necessary or desired changes in light of the updated rule. Therefore, employers are well advised to undertake their review of the exempt/nonexempt classification of their employees, identify anyone whose status will change as of December 1, analyze the available options and prepare to implement any changes and desired strategies well in advance of the December 1, 2016 effective date of the updated rule.
For additional information about your rights and obligations under the updated rule and strategies to manage its impact, please contact Reavis Parent Lehrer LLP Partner Deena R. Merlen, who regularly counsels clients in employment and labor law matters.
This article, which may be considered attorney advertising in some states, is intended only as a general discussion of these issues. It is not considered to be legal advice or relied upon. Deena R. Merlen would be pleased to consider providing additional details or advice about specific situations.