On May 18, 2016, the U.S. Department of Labor (“DOL”) released the text of its Final Rule “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act” (the “Final Rule”). As indicated by the proposed rule published last summer, the Final Rule implements a significant increase to the salary level required for exemption from minimum wage and overtime for executive, administrative and professional (“EAP”) employees, but leaves the duties requirements for such employees unchanged.
The Fair Labor Standards Act (“FLSA”) requires that all employees, with limited exceptions, receive a minimum wage for all hours worked during the workweek and overtime pay at 1.5 times their regular rate for hours worked over 40 in any workweek. According to the DOL, EAP employees have historically been exempt from the FLSA’s minimum wage and overtime requirements based on a belief that the type of work they performed would be difficult to share among other employees, and that they enjoyed salaries well above the minimum wage and other privileges to compensate them for long hours of work. However, following major revisions to the overtime regulations in 2004, including removal of the limitation on the amount of non-exempt work employees could perform and still fall within the EAP exemption, the DOL became concerned that many lower-wage workers who performed little EAP work were being misclassified as exempt from the minimum wage and overtime requirements.
To qualify for exemption as an EAP employee, three requirements must generally be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of 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 primary duties must involve executive, administrative, or professional duties (“duties test”).
The Final Rule changes only the requirements for the salary-level test, which the DOL believes is the “best single test of exempt status” for EAP employees. In updating the salary level, the DOL hopes to ensure that future workers will not be denied the protections Congress intended to afford them under the FLSA.
Highlights of the Final Rule
The Final Rule contains three major changes:
- Increasing the salary level for EAP employees to $913 per week ($47,476 annually), with automatic updates every 3 years based on the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region;
- Permitting employers to count nondiscretionary bonuses, incentives and commissions toward up to 10% of the required salary level; and
- Increasing the annual compensation level for highly compensated EAP employees to $134,004, with automatic updates every 3 years based on the 90th percentile of full-time salaried workers nationally
The increased salary level is not a minimum wage requirement – no employer is required to pay an employee the amounts listed above unless the employer is claiming an EAP exemption. Employers should be reminded, however, that the salary level is only one part of the three-part test. For an EAP employee to qualify as exempt from minimum wage and overtime requirements, he or she must receive compensation on a salary basis of not less than $913 per week ($47,476 a year) and meet the applicable duties test for the exemption claimed by the employer. This means that increasing an employee’s salary to meet the minimum salary threshold does not necessarily mean that the employee is properly classified as exempt. Therefore, employers should consider taking this opportunity to evaluate exempt employees’ duties to confirm that employees are, in fact, performing the duties of an exempt EAP employee.
In a departure from the proposed rule, the Final Rule allows employers to satisfy up to 10 percent of the weekly salary level test ($913) through nondiscretionary bonuses and incentive payments, including commissions, provided these amounts are paid on a quarterly or more frequent basis. Additionally, employers may meet the salary level requirement for EAP employees by making a catch-up payment within one pay period of the end of the quarter. The effect of the ability to make a “catch-up payment” is that employers who pay each EAP employee at least 90% of the salary level requirement each quarter, but ultimately fall short (despite payment of nondiscretionary bonuses and incentives), have one pay period to make up for the shortfall (up to 10% of the salary level).
Highly Compensated EAP Employees
Under the Final Rule, highly compensated employees will be exempt from minimum wage and overtime if: (1) they earn at least $134,004 or more per year, which includes at least $913 per week paid on a salary basis; (2) their primary duties include performing office or non-manual work; and (3) they customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
Note that the allowance of nondiscretionary bonuses to account for up to 10% of the weekly salary level for regular EAP employees does not change the previous requirement that highly compensated EAP employees must receive at least the standard salary amount each week ($913) without regard to the payment of nondiscretionary bonuses and incentive payments.
Guidance from the DOL
In addition to general guidance concerning the Final Rule, the DOL has issued guidance for compliance for non-profits and higher education institutions. Employers may find these tools useful in determining how best to comply with the Final Rule.
The Final Rule’s Impact on Employers
The Final Rule will impact employers in a variety of ways, including, for example, increased payroll costs, greater administrative/recordkeeping burdens, and, potentially, lowered employee morale. For example, employers who determine a need to reclassify employees as nonexempt must ensure that such employees are properly recording their hours, as well as implement and enforce workplace rules to curb excessive overtime. In addition, employees previously classified as salaried exempt may view their conversion to an hourly rate and the requirement to record their hours as a demotion.
The DOL has extended the effective date of the Final Rule until December 1, 2016 in an effort to afford employers sufficient time to come into compliance. However, employers should begin now to evaluate whether any of their exempt employees will be eligible for overtime wages under the new regulations. For example, employers should closely monitor employees’ hours between now and December 1, 2016 to obtain a realistic representation of the potential overtime exposure associated with reclassifying employees. Many employers will be faced with the option of either raising employees’ salaries to meet the new salary level test, or converting employees previously classified as exempt to an hourly rate, potentially increasing overtime wages paid to employees.
Leech Tishman’s Employment Practice Group has extensive experience advising employers on exempt and nonexempt classification issues under the FLSA and guiding employers through U.S. Department of Labor Wage and Hour Division Audits. We will update this alert as more information on the Final Rule becomes available and will be scheduling a seminar on the changes to the FLSA overtime regulations. If you would like to receive more information about the upcoming seminar, please contact us.
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