Long-Awaited Changes to Overtime Rules Come into Effect on December 1, 2016

November 16, 2016

5274The Fair Labor Standards Act (“FLSA”) establishes the minimum wage and a maximum number of work hours for employees engaged in commerce or in the production of goods for commerce or for employees employed in an enterprise engaged in commerce, or in the production of goods for commerce in private employment. Besides establishing the minimum wage, the FLSA also establishes overtime pay, equal pay, record keeping requirements, and sets child labor standards.

In 2014, President Obama directed the Department of Labor (“DOL”) to update and modernize the regulations governing the exemption of executive, administrative, and professional (“EAP”) employees from the minimum wage and overtime pay protections of the FLSA. The Department published a notice of proposed rulemaking on July 6, 2015, and received more than 270,000 comments. On May 18, 2016, the DOL announced that it would publish a Final Rule to update the regulations. The full text of the Final Rule was published at the Federal Register Site and the changes will go into effect as of December 1, 2016.

Although the FLSA ensures minimum wage and overtime pay protections for most employees covered by the FLSA, some workers, including bona fide EAP employees, are exempt from those protections. Since 1940, the DOL’s regulations have generally required each of three tests to be met for the FLSA’s EAP 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”). The DOL last updated these regulations in 2004, when it set the weekly salary level at $455 ($23,660 annually) and made other changes to the regulations, including collapsing the short and long duties tests into a single standard duties test and introducing a new exemption for highly compensated employees (“HCEs”).

The Final Rule updated the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-protected employees, thus making the EAP exemption easier for employers and workers to understand and apply. Without intervening action by their employers, it extends the right to overtime pay to an estimated 4.2 million workers who are currently exempt. It also strengthens existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers whose entitlement to overtime pay will no longer rely on the application of the duties test.

As of December 1, 2016, the standard salary level for the EAP exemptions is set at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week, equivalent to $47,476 per year for a full-year worker).  The special salary level as of that date for employees in American Samoa is $767 per week and the special “base rate” for employees in the motion picture industry is $1,397 per week.

In order to satisfy the “salary basis” requirement, the employee must regularly receive a predetermined and fixed amount of compensation each pay period on a weekly, or less frequent, basis.  The predetermined and fixed amount cannot be reduced because of variations in the quality or quantity of the employee’s work and, subject to limited exceptions, 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.

Employers can use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. Such payments may include, for example, nondiscretionary Gutterman WLEC bannerincentive bonuses tied to productivity and profitability. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, such payments must be paid on a quarterly or more frequent basis and employers are permitted to make a “catch-up” payment.  While companies often pay significantly larger bonuses; where larger bonuses are paid the amount attributable toward the standard salary level is capped at 10 percent of the required salary amount.

HCEs performing office or non-manual work and paid total annual compensation of at least the specified salary level requirement described below will be considered to be exempt if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

As of December 1, 2016, the total annual compensation level for the HCE exemption is set at an amount equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually). To be exempt as an HCE, an employee must also receive at least the then-current standard salary amount (i.e., $913 per week as of December 1, 2016) on a salary or fee basis and pass a minimal duties test.

HCEs must receive at least the full standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments; however, nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the total annual compensation requirement.  The DOL believes that permitting employers to use nondiscretionary bonuses and incentive payments to satisfy the standard salary amount for HCEs is not appropriate because employers are already permitted to fulfill almost two-thirds of the total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation.

The DOL regulations make it clear that the exemptions are intended only for “white collar” employees who meet the prescribed salary and duties tests and that it is not intended that the exemption be applicable to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. Accordingly, FLSA-covered, non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt regardless of how highly they are compensated. The exemptions also do not apply to police, fire fighters, paramedics and other first responders.

The standard salary level requirement for the HCE exemption will be automatically updated every three years to maintain the threshold equal to the 90th percentile of annual earnings of full-time salaried workers nationally.  All updated rates will be published in the Federal Register at least 150 days before their effective date and will also be posted on the Wage and Hour Division’s website.  The next update will go into effect as of January 1, 2020.

The Final Rule did not change any of the existing job duty requirements to qualify for exemption. The DOL expects that the standard salary level set in the Final Rule and automatic updating will work effectively with the duties test to distinguish between overtime-eligible workers and those who may be exempt. As a result of the change to the salary level, the number of workers for whom employers must apply the duties test to determine exempt status is reduced, thus simplifying the exemption. Both the standard duties test and the HCE duties test remain unchanged.

While there has been some talk about changes to the Final Rule under a new Trump Administration, for now employers all around the country need to carefully review and update their overtime policies and procedures.  For further discussion, see Employment Law Compliance (§§172.1 et seq.).

Titles by Alan Gutterman