Legal Insights

FLSA Overtime Rule Update

By: June 1, 2016

Businesses must soon determine if the Department of Labor’s (Department) updated overtime rules published under the Fair Labor Standards Act (FLSA), taking effect December 1, 2016, impact them. The revised rules are the outcome of President Obama’s aim to solidify the precept that “a hard day’s work deserves a fair day’s pay.” They raise the standard salary required for application of a “white collar” exemption (in 29 CFR Part 541). Not all employees work overtime or fall into an exemption, but employers need to look at how they classify and compensate employees to see whether changes affect them.

When Do the Rule & Exemption Apply?

Remember FLSA is broadly construed to afford employees protection concerning wages earned and hours worked. FLSA covers employees (a) of organizations with annual gross revenue exceeding of $500,000, (b) engaged in interstate commerce or producing goods for commerce; and (c) of hospitals, medical facilities that care for their residents, schools and public agencies.

FLSA includes white collar exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and some computer related employees. The three tests used to decide if an exemption applies are (i) the salary basis test – how is the employee paid; (ii) salary level test – how much is the employee paid; and (iii) duties test – what job-tasks does the employee perform. All tests must be satisfied in order. It is neither job title nor salary alone that guides exemption application. Note, this test does not apply to doctors, lawyers or teachers.

What Do These Tests Mean?

The salary basis test means the employee is regularly paid a pre-determined fixed wage not reduced for quality or quantity of work. Unless the employee does not work for a particular week, the employer must pay her salary regardless of days worked. Employers can chose to pay on a fee basis predetermined for a specific job- the total paid is divided by hours worked on the job to determine satisfaction of the set standard weekly salary amount.

The salary level test is based on the amount an employee earns. This standard salary level is increased by the overtime rule from $455/week ($23,660 annually) to $913/week ($47,476 annually) – or at least $27.63/hr. for computer professionals. Those paid less than the standard salary are entitled to overtime pay when working more than 40 hours/week. Employers are not required to pay a salary at or above the standard level unless claiming a white collar exemption. Overtime rules will automatically update salary and compensation levels every three years starting with 2020.

A big change to the salary level test is an employer can include non-discretionary bonuses or incentive payments to account for up to10% (up to $91/week) of an employee’s. To qualify, incentive payments must be paid at least quarterly. The employer must make a catch up payment no later than the first pay period ending after any given quarter where an employee does not receive at least the 10% of the standard salary in bonus payments. Failure to make the catch up payment means the exemption is lost for the applicable pay-period and all overtime wages that would have accrued are due to the employee.

Employees who meet the salary level may be exempt from overtime pay if they satisfy the duties test. The duties test remains the same in the overtime rules. This test applies differently based on the type of employee and their salary. Highly compensated employees, earning $134,004 base level salary or more annually, are subject to a more relaxed test than other professionals.

What Can Employers Do?

According to the Department, employers have many options for how to respond to overtime rules, none of which are favored by the Department. Employers do not have to require employees use a clock in/clock out system, so long as records are maintained accurately. Past that, once an employer determines if an employee satisfies all three white collar exemption tests, then they need to determine how or if to adjust hours and wages. Options suggested by the Department include (1) raise salaries to maintain exemptions; (2) pay current salaries with overtime pay after 40 hours; (3) reorganize workloads; and (4) adjust wages

Obviously one option is to raise salaries of employees to the minimum standard salary level. Presuming the employees compensated in an amount close to the standard level, this is a decent option- especially if the employee works overtime more often than not.

Reorganizing workloads or adjusting schedules can go a couple ways. Employers with some employees who are each under and over worked can distribute tasks so all employees work 40 hours or less per week. Or the employer may hire more part-time workers, while risking that if those workers want a full-time job they may leave once they find one.

Employers with employees not often working over 40 hours can simply pay overtime payments for the additional hours instead of worrying about the white collar exemption. Note employees must be paid based on actual hours worked for the period – as in the calculation of whether their wages are at or above the standard salary are based on the actual amount paid divided by actual hours worked – but again, employers cannot just reduce a salary if the employee works less than 40 hours in a given pay period.

Last, the Department suggests employers can adjust, with the mutual agreement of the employee, regular hourly wages and overtime wages so the total wages earned for a pay period are roughly the same, but apportioned in a manner that either satisfies the exemption tests or equates in the employer paying overtime- this is a hybrid of the first and second suggestions and may be hard to manage from employee to employee or for employer’s whose business fluctuates in an unpredictable fashion.