In a February 2016 blog post, I discussed an anticipated major change in the criteria for determining who can be exempt from payment of overtime wages.
The Fair Labor Standards Act (FLSA) guarantees payment of overtime wages at a rate of 1.5 times the base hourly rate of pay for all hours worked in excess of 40 in a week. The FLSA exempts certain employees, however, from payment of overtime wages. The most common of the “exempt” employees are those who fall under the “executive,” “administrative,” and “professional” categories. These exemptions, along with the “highly compensated employee” exemption, are referred to as the “white collar” exemptions. Employees who fall within these exemptions are not entitled to payment of any overtime regardless of the number of hours they may work in a week.
When determining which employees can be treated as exempt from overtime pay, there are a series of tests that must be met. The first of these is referred to as the “salary basis test.” It requires that the employee receive a fixed weekly salary that meets or exceeds a minimum specified amount under U.S. Department of Labor (DOL) regulations. That amount currently is $455.00 a week, which equates to $23,660 per year on a full-time basis. In 2015, the DOL announced it was considering increasing the minimum salary under the salary basis test to at least double its current rate. In addition, and in a break from previous practice, the DOL proposed adopting a mechanism by which the minimum salary is automatically adjusted on a periodic basis.
On May 18, 2016, the DOL issued its final rule implementing regulations on this subject. While there is some minor change in what was originally proposed, what was expected to go into effect will become law on December 1, 2016.
The most notable aspects of this final rule are:
- The new minimum salary for overtime exempt employees will be $913.00 per week, which equates to $47,476.00 annually. This figure is slightly less than what was originally proposed.
- The final rule provides that up to 10% of the salary threshold can include bonus income, incentive pay, and commissions, provided that payment of those are non-discretionary and made on at least a quarterly basis. Thus, one-time year-end and discretionary bonuses cannot be counted.
- The minimum salary will be adjusted every 3 years, with the first adjustment to occur on January 1, 2020. The original proposed rule contemplated annual adjustments. The DOL estimates that the increased minimum salary for January 2020 will be $51,168.00.
I have heard from several employers that while they understood this proposed change “was out there,” they did not believe it would ever go into effect in the current political climate. It now has. Employers have less than 6 months to make decisions regarding how to comply with this change for currently exempt employees earning less than $47,476.00 annually. Generally speaking, employers have a choice either to (1) increase formerly exempt employees’ salaries up to the new threshold; (2) reclassify formerly exempt employees making less than the minimum salary to non-exempt and pay overtime for hours worked in excess of forty; or (3) reclassify formerly exempt employees as non-exempt, limit their hours to no more than 40 in a week, and hire additional employees.
In the midst of this discussion, some employers may forget that paying the minimum salary is only one of several tests to be met before a “white collar” employee can be deemed exempt from overtime. As employers undertake the analysis necessary to comply with this new law, I encourage them to have qualified legal counsel review the job duties of all exempt employees to ensure that they are properly classified.
If you would like to speak to John Lawhorn on this or any other matter, he may be reached at (865) 546-9321.