Part of the U.S. Department of Labor’s (DOL) mission is to foster, promote, and develop the welfare of wage earners. In May 2016, the DOL released the final rules, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” (81 Federal Register 32391), modifying regulations under the Fair Labor Standards Act (FLSA) that guarantee minimum wage and overtime pay for various workers, including executive, administrative, professional, outside sales, and computer employees. Since these modifications become effective on December 1, 2016, there isn’t much time for companies to address them.
The DOL’s Wage and Hour Division enforces the FLSA, which establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in federal, state, and local governments. Under the FLSA, covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009. Overtime pay at a rate not less than one and one half times the regular rate of pay is required after 40 hours of work in a workweek unless the worker is exempt under the FLSA rules. (It should be noted that the FLSA doesn’t preempt any stricter state law or local standards; the higher standard applies per 29 USC §218.)
As defined and established in the codified regulations at 29 CFR Part 541, there are exemptions to the overtime rules. These exemptions are frequently referred to as the EAP (executive, administrative, and professional) or “white collar” exemptions per the Preamble of the new regulations published in the Federal Register. To be considered exempt, employees must meet certain minimum requirements related to their primary job duties and, in most instances, must be paid on a salary basis at not less than the minimum amounts specified in the regulations. The new rules update the standard salary level and total annual compensation requirements that were previously set in 2004 to determine whether an employee is exempt from the overtime rules.
THE UPDATED RULES
There are three tests that qualify an employer to treat an employee as exempt from the overtime pay requirement: salary basis test, salary level test, and duties test. The salary basis test is satisfied if an employee is paid a fixed salary that isn’t reduced because of variations in quality or quantity of work. The salary level test, as its name implies, sets a threshold salary level that is either met or not met. In other words, there is no phase-out range. The duties test refers to the employee’s job duties and must primarily involve executive, administrative, or professional duties.
The new rules update the salary level beginning on December 1, 2016. Specifically, an employee is exempt from the mandatory overtime if his or her salary level is $913 per week (or $47,476 annually). These amounts are based on the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage region of the United States census, which currently is the South.
The current salary levels are $455 per week ($23,660 annually). When this rule goes into effect on December 1, white collar employees with salary levels between $23,660 and $47,476 will become eligible for overtime.
In addition to the changes in the salary level amount, the revised regulation updates the exemption amount for those qualifying as highly compensated employees (HCE). Beginning on December 1, 2016, the threshold amount for HCE increases to $134,004 from the current $100,000. And, yes, that $4 is part of the total and not a typo: The figure is based on the 90th percentile of earnings of full-time salaried workers nationally.
With the new rules, there is also now some wiggle room for the first time for employers to satisfy the salary level test. Specifically, employers can include up to 10% of the standard salary requirement (i.e., up to $4,747 (10% of $47,476)) with nondiscretionary bonuses, incentive payments, and commissions—but only if the amounts are paid at least quarterly.
The revisions also contain a provision for automatically updating the threshold amounts under the salary level test and the HCE group. Those figures will be updated every three years beginning on January 1, 2020. The DOL held that regularly updating the salary and compensation levels is the best method to ensure that these tests continue to provide an effective means to distinguish between overtime-eligible white collar employees and those who may be EAP employees. Based on historical wage growth in the South census region, the standard salary level is likely to be approximately $984 per week ($51,168 annually for a full-year worker) at the time of the first update on January 1, 2020, and the HCE total annual compensation requirement is likely to be approximately $147,524. Of course, these are just the DOL’s rough estimates and may not be the actual amounts that will be used.
In addition, an employer can treat employees as exempt from the mandatory overtime payment if the employees fall into an excluded occupation. Teachers, academic administrative personnel, physicians, lawyers, judges, and outside sales workers are named occupations and thus aren’t subject to the salary level or salary basis tests. Footnote 98 of the final rules at 81 Federal Register 32453 provides that academic administrative personnel include admissions and academic counselors. The rule goes on to state, however, that these personnel need to be paid a salary that’s at least equal to the entrance salary for teachers in the educational establishment at which they are employed. Also, 29 CFR §541.304(b) notes the term “physician” includes medical doctors, general practitioners, specialists, osteopathic physicians, podiatrists, dentists, and optometrists.
POSSIBLE COMPANY ACTIONS
Many organizations are speculating the possible actions that companies may take in response to the updated salary levels. Within the more than 270,000 individuals and organizations that commented for the final regulations, surveys found that companies will reduce the number of hours of those who would no longer be exempt, increase salary to continue their employee’s exempt status, reclassify currently exempt employees rather than pay higher salaries, convert currently nonexempt employees to hourly pay and thereby maintain current salary levels even with overtime pay, or restrict overtime hours. Some other companies indicated they will eliminate some fringe benefits currently given to exempt employees in order to pay for the added overtime costs. Given the tax benefits accruing to fringe benefits, this action could significantly affect the overall income positions of affected employees.
While the time period between when the final rule was published and when it goes into effect is short, companies have known that changes were coming. In March 2014, President Obama signed a Presidential Memorandum directing the DOL to update these regulations, so there have been more than two years to prepare for the likely outcome of the final rules. But that might not change the sting of the new rules for some companies.
© 2016 A.P. Curatola
August 2016
