The Department of Labor recently released the final rules regarding the payment of overtime to employees, governed by the Fair Labor Standards Act (FLSA). While the new rules were to go into effect in June of 2015, a large number of modifications changed the original draft, and the final rules are now made effective December 1, 2016. This will allow employers the opportunity to anticipate the broad changes that will go into effect.
Under the current rules, employees earning $23,360 or less must be paid overtime at a rate of time and a half for work in excess of 40 hours per week. The new rules effectively double the annual salary to $47,476 or $913 per week, below which level each employee must be paid time and a half for hours worked in excess of 40 hours per week. This applies to full-time salaried workers.
Up to 10% of the Standard Salary Level can be satisfied through non-discretionary bonuses, incentives or commissions paid at least quarterly. Thus, an employee earning less, but paid a non-discretionary bonus, incentive or commission on a quarterly basis of up to 10% of their salary, will not be required to automatically receive overtime compensation if the total wages plus 10% of those wages exceed $47,476 per year.
The new regulations also redefine “Highly Compensated Employees” and increases the level to $134,004 in total compensation, such that any employee earning above that level will be deemed “highly compensated,” and hence not subject to the overtime requirement.
Both the Standard Salary Level ($47,476) and the Highly Compensated Employees level ($134,004) will be automatically updated every three years to achieve a 40th percentile and 90th percentile, respectively, in setting the Standard Salary Level and Highly Compensated Employees level to account for inflation. The first automatic adjustment will occur in January of 2020.
The FLSA further allows exemptions from overtime eligibility for certain categories, assuming the employees meet the above-recited Standard Salary Level, where the employee customarily and regularly performs at least one of the duties listed for the executive, administrative or professional exemptions which follow:
- Executive – the employee’s primary duty must be to manage the business enterprise or a recognized department or subdivision of the enterprise, and the employee must regularly and customarily direct the work of at least two or more other full-time employees or their equivalents; and the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees must be given particular weight.
- Administrative – 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 must include the exercise of discretion and independent judgment with respect to matters of importance.
- Professional – the employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment in the field of science or learning, and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
- Creative Professional Employee – the employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
- Computer Employee – employee is employed as a computer systems analyst, programmer, software engineer or similar skill-set, performing the following duties if the primary duty consists of the application of systems analyst techniques and procedures, including consulting with users to determine hardware, software or systems functional specifications, the design, development, documentation, analysis, creation, testing or modification of computer systems or programs related to systems design specifications or related to a specific user or to machine operating systems, or a combination of these duties, which require the same skill-set.
- Outside Sales – employee’s primary duty must be making sales or obtaining orders or contracts for services or the use of facilities for which a consideration (money) will be paid by the customer, and the employee must be customarily and regularly engaged away from the employer’s place of business.
If the employee does not qualify as a “Highly Compensated Employee,” then the employee’s duties must meet all of the requirements in the aforesaid subcategories as Executive, Administrative, Professional, Computer Employee or Outside Sales.
There are a variety of strategies that the employer can engage for compliance, such as:
- Converting salaried employees to hourly
- Reducing the number of hours each employee works
- Increasing base salary for employees who perform exempt duties and are currently paid below the Standard Salary Level
- Reclassifying employees as non-exempt and pay overtime as required
- Reclassifying employees as non-exempt and reduce hourly rate to maintain total annual compensation
- Reviewing all incentive, bonus and commission programs to determine if any financial increases can be offset by decreases elsewhere in a rewards program
- Reviewing the structure of the workforce and work processes
No single test or strategy will solve every employment issue or consideration, therefore a variety of strategies may be required.
As the new rules more closely approximate actual compensation in the marketplace, there will be more employees subject to the requirement of overtime compensation and the employer must take greater heed to assure compliance with the FLSA imposed by the Department of Labor and avoid the penalties and sanctions which noncompliance may generate.
Gerald C. Davis is a partner in our Livonia office where he concentrates his practice on corporate and business law, leveraged buy-outs, company reorganization and refinancing, analyzing investments for joint ventures, intellectual property, and drafting loan agreements. He may be reached at (734) 261-2400 or firstname.lastname@example.org.