From the Desk of John Kreutzer: The US Department of Labor recently updated the regulations governing the exemption of executive, administrative, and professional employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act (“FLSA”). This exemption from the FLSA is sometimes referred to as the “white collar” exemption. For this exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).
This recent update to FLSA, mostly focused on the “salary level test,” increased the required salary for exempt employees from $23,660 per year to $47,476 per year. This change is expected to affect an estimated 4.2 million workers who are now misclassified.
Here is how FLSA works, and how this update will affect employers:
FLSA: This Act establishes minimum wage, overtime pay and recordkeeping standards for employees in the private sector and in Federal, State, and local governments. Almost all employees in the US are covered by this Act.
Overtime: Unless specifically exempted, employees covered by the FLSA must receive pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half their regular rates of pay. These are commonly called non-exempt employees.
“White Collar” Exemption to Overtime: As previously mentioned, for an employee to be exempted from overtime that employee must pass three tests, the “salary basis test,” the “salary level test,” and the “duties test.” Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers). Also, highly compensated employees (employees who earn $134,004+) must only pass the “salary level test” and a “minimal duties test.” These are commonly called exempt employees.
“Salary Basis Test” – Generally, being paid on a “salary basis” means an employee regularly receives a set salary that cannot be reduced because of variations in the quality or quantity of the employee’s work. An exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Tip: A “salaried employee” is not automatically an exempt employee.
“Salary Level Test” – Under this test, for an employee to be classified as exempt he/she will have to receive an annual salary greater than $47,476.
“Duties Test” – This test is always the most difficult with which to comply. This is a highly fact specific test because an employee’s job duties must meet ALL (see note) of the criteria specified in one or more of the following exemptions: Executive; Administrative; Professional. Tip: A “manager” is not automatically an exempt employee.
Executive – Must: (1) manage an enterprise, department or subdivision (2) regularly direct the work of at least 2+ full-time employees and (3) hire and fire or whose recommendations on hiring and firing carry weight.
Administrative – Must: (1) perform office or non-manual work directly related to management or general business operations and (2) exercise discretion and independent judgment with respect to matters of significance, free from immediate direction or supervision.
Professional – Must: perform work requiring advanced knowledge (2) knowledge must be in field of science or learning (Accounting, Law, Teaching, Engineering, Biological, Chemical or Physical Sciences); and (3) knowledge customarily acquired by a prolonged course of specialized intellectual instruction.
Note: Minimal Duties Test for HCE – Employees who earn $134,004+, need only perform one of the duties of an exempt executive, administrative, or professional.
2016 Updates Takeaways:
Options moving forward: Employers may choose to: (1) increase the salary of an employee who meets the “duties test” to the new salary level in order to retain his or her exempt status; (2) pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked; (3) reduce or eliminate overtime hours; or (4) reduce the amount of an employee’s base salary and add that pay to account for future overtime hours worked.
Regardless of the choice, employers should regularly update the salary levels to ensure that these tests continue to provide an effective means of distinguishing between overtime-eligible white collar employees and those who may be bona fide exempt employees. Experience has shown that these earning thresholds are only effective measures of exempt status if they are kept up to date.
View the Department of Labor FAQ’s at: https://www.dol.gov/whd/overtime/final2016/faq.htm
Employment updates are intended to inform our clients and others about legal matters of current interest. They are not intended as legal advice. Readers should not act upon the information contained in this article without seeking professional counsel.