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On May 18, 2016, President Obama announced the publication of the United States Department of Labor’s final rule updating overtime regulations. These new regulations go into effect on December 1, 2016, and raise the standard salary level requirement for white collar employees to be exempt from federal minimum-wage and overtime pay protections under the Fair Labor Standards Act. The new regulations increase the standard salary level for exempt full-time salaried employees from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The amounts were set according to the 40th percentile of weekly earnings for full-time salaried employees in the lowest-range Census Region, which currently is the South.
The Department of Labor’s new final rule also allows employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level, as long as the payments are made on at least a quarterly basis.
Lastly, the new rule makes it so the salary threshold automatically updates every three years, based on wage growth over time in order to maintain salaries at the levels set by the final rule. The first automatic update is scheduled to take effect January 1, 2020.
With the exception of the standard salary level, the final rule does not change the white collar exemption requirements previously set by the United States Department of Labor. A full-time salaried employee receiving a salary at the levels set by the final rule is insufficient to exempt the employee from overtime pay. In order for an employee to qualify as exempt from overtime pay, they must meet all of the requirements under one of the exemptions as described below[1]:
Executive Exemption
To qualify for the executive employee exemption, all of the following requirements/tests must be met:
The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week;
The primary duty of the employee must be management of the enterprise or management of a department or subdivision of the enterprise
The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent and have authority to hire or fire other employees, or their suggestions as to hiring firing, advancement, promotion or any other change of status of other employees must be given weight.
Administrative Exemption
To qualify for the administrative employee exemption, all of the following
requirements/tests must be met:
The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week;
The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
The administrative exemption is designed for relatively high-level employees whose main job is to “keep the business running.” Employees who make what a business sells are not considered administrative employees, and do not qualify for the exemption.
Learned Professional Exemption
To qualify for the learned professional employee exemption, all of the following
requirements/tests must be met:[2]
The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week;
The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
The advanced knowledge must be in a field of science or learning; and
The advance knowledge must be acquired by a prolonged course of specialized intellectual instruction
Moving Forward With Compliance
In order to maintain compliance with the implemented amendments to the Fair Labor Standards Act, employers should confirm that employees who previously met the exemption requirements will continue to meet these requirements following the effective date of December 1, 2016. If the employee meets all of the requirements, the exemption will remain in place for that employee. Because the duty requirements under the exemptions did not change, the salary level of the employee will likely be the single factor that may require a modification. At that time the employer must determine whether they will raise the employee’s salary in order to keep the employee’s exempt status, or allow the employee to become eligible for overtime pay.
If the employee does not meet all the requirements for one of the exemptions, the employer will be required to pay the employee overtime for any hours worked in excess of 40 hours per week. Two alternatives available to employers would be eliminating or reducing overtime hours in the workplace or reducing the amount of pay allocated to the employee’s salary, to pay out overtime hours the employee incurs.
For more information about this topic please contact Steve Leigh at sml@martinleigh.com or Matt Peters at mmp@martinleigh.com.
[1] Qualifications for the employee exemptions are from the Department of Labor’s Wage and Hour Division’s Fact Sheet under the Fair Labor Standards Act.
[2] The Department of Labor has identified some occupations that are not subject to the requirements of the executive, administrative or learned professional exemptions, and are automatically ineligible for overtime pay. These occupations are teachers, academic administrative personnel, lawyers, judges, physicians and outside sales employees.
