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  • Major Change in Criteria for Determining Who Can Be an Overtime Exempt Employee Expected This Year

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Employment Law

The official Frantz, McConnell, and Seymour, LLP blog.

Major Change in Criteria for Determining Who Can Be an Overtime Exempt Employee Expected This Year

Major Change in Criteria for Determining Who Can Be an Overtime Exempt Employee Expected This Year

The Fair Labor Standards Act (FLSA) was enacted in 1938 for the primary purposes of guaranteeing workers a minimum hourly wage and overtime pay at a rate of 1.5 times their base hourly rate of pay for hours worked in excess of 40 in a work week.

Certain types of employees, however, are exempted from the overtime pay protections of the FLSA (“exempt employees”). The most common exemptions under the FLSA are for positions deemed “executive,” “administrative,” and “professional.” These exemptions, along with another for “highly compensated employees” are often referred to as the “white collar” exemptions. These exemptions from overtime requirements have been in place since the inception of the FLSA. The rationale for exempting “white collar” employees from overtime pay requirements is premised on the assumption that such employees tend to be more highly compensated and also receive non-wage benefits that often are more valuable than those offered to hourly employees, such as more generous leave benefits, greater job security, and more significant opportunities for advancement and higher wages.  

The FLSA itself does not define the terms “executive,” “administrative,” or “professional.” The job of defining these classifications of exempt employees was delegated to the United States Department of Labor (DOL) through its power to issue regulations implementing the FLSA. Toward that end, DOL regulations outline certain job duties and responsibilities for each classification that must be met in order for a worker to be deemed exempt under that classification. Those requisite job duties are referred to as the “duties test.”  

The “duties test” for each exempt position, however, is the last step in the process of determining whether an employee can be deemed exempt from overtime pay as an executive, administrative, or professional employee. Before ever reaching the duties test, two more basic threshold requirements must be met. First, the employee’s compensation must be a fixed salary that cannot be reduced due to variations in the amount of work performed (the “salary basis test”). In other words, to meet the “salary basis test,” the employee must receive no less than her fixed, predetermined salary for each week in which she performs work without regard to the number of hours worked. Second, the amount of compensation paid to the executive, administrative, or professional employee must be at least a minimum specified amount as stated in DOL regulations (the “salary level test”).

Anticipated Changes to the Salary Level Test

The DOL recently announced it is considering substantial changes to the present “salary level test.” Currently, DOL regulations provide that an overtime exempt executive, administrative, or professional employee must be paid at least $455.00 per week. This equates to $23,660 per year on a full time basis. One of the changes proposed by the DOL is raising the minimum salary level to $970.00 per week, or $50,440.00 annually for a full time worker. In addition, and in a break from prior practice, the DOL proposes to adopt a mechanism by which the minimum salary under the “salary basis test” is automatically adjusted on an annual basis.  

The proposed increase in the minimum salary is obviously significant, given that it is more than double the current minimum. The DOL estimates that the proposed change will immediately reclassify in excess of 4.5 million currently exempt employees as non-exempt and entitled to receive overtime pay unless their employers raise their salaries to meet the proposed minimum.  

The DOL’s stated justification for this increase of the minimum salary level is that the current level of $455.00 per week, which was set in 2004, is out of date and no longer effective as a means of differentiating between true “white collar” personnel and non-exempt employees for whom overtime wage protections were envisioned as being necessary. In this regard, the DOL notes that the current annual salary threshold of $23,660.00 is actually less than what is considered the poverty threshold for a family of four in 2014 ($24,008.00). The DOL also compares the current minimum threshold to the wages of a full time worker earning minimum wage of $7.25 an hour ($15,080.00 annual) and concludes there simply is insufficient differentiation between those wages.  

Some anecdotal evidence indeed suggests that the current minimum salary threshold is out of date and in some instances lends itself to abuse. For instance, it is not unusual in retail and restaurant settings for first level management employees, whose stated job duties place them within the administrative exemption classification, to regularly work 50+ hours a week for annual wages that equate to little more than $12.50 an hour. The DOL also claims it has received employee complaints of alleged manipulation of job descriptions for production employees in the manufacturing sector to re-characterize hourly production employees as “managers” under the administrative exemption classification to avoid payment of overtime. Clearly, the intent of the DOL is to provide a much wider separation between the wages currently paid to typical hourly non-exempt employees and those paid to individuals occupying positions traditionally regarded as “white collar,” or truly managerial.

The Anticipated Impact

Most observers anticipate these proposed changes, if adopted, will take effect in mid to late 2016. For some industries, the proposed increase in the minimum salary threshold for exempt status will result in payment of significantly higher wages in one form or another. Employers in all sectors, however, need to begin now analyzing their positions currently deemed exempt to the extent those serving in them are paid less than the proposed weekly threshold of $970.00. For some employees, the decision may simply be to raise their weekly salary to the minimum threshold amount and retain the exempt classification. For others who may be compensated at substantially less than the proposed salary minimum, they will need to be reclassified as “non-exempt” employees for purposes of overtime pay requirements. If those employees regularly work significantly more than 40 hours each work week, staffing levels will also have to be analyzed in order to minimize the additional cost of premium overtime pay.

 If you would like to speak to John Lawhorn on this or any other subject, he may be reached at (865) 546-9321.

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