New rules affecting overtime pay for white collar employees go into effect Dec. 1, 2016. Although much of the Fair Labor Standards Act (FLSA) and its regulations remain unchanged, approximately 4 million more workers will now be eligible for overtime pay. Companies are well-advised to review both their overtime policies and payrolls to ensure they are in compliance with the new regulations.
The new regulations change the minimum salary requirements for what is known as the “white collar exemption” to the FLSA. the FLSA generally requires that all employees who work more than 40 hours per week must be paid at least one and one-half times their regular rate of pay for every hour over 40. the FLSA also contains various exemptions for certain employees, including commissioned salespeople, farmers and some auto dealership employees among others. the latest change affects those employees exempt because they are employed in a bona fide executive, administrative or professional (EAP) capacity.
The EAP exemption only applies to individuals that are compensated on a salary basis and meet other specific requirements depending on their position. For executive employees, the employee’s primary duties must be managing the company or a recognized department or subdivision of the company and having the authority to assist in determining whether to hire or fire other employees. the primary duties of an administrative employee must be performance of office or non-manual work directly related to the management or business operations of the employer and include the discretion and independent judgment with respect to matters of significance. Professional employees must perform work requiring advanced knowledge that is predominantly intellectual in character in a field of science or learning. the Department of Labor has repeatedly emphasized that a job title is not controlling as to whether an employee qualifies for this exemption and a recent lawsuit in the Eighth Circuit Court of Appeals (the federal appellate court covering Minnesota) closely examined the actual ability of an “executive” to terminate employees to determine if the employee was exempt.
The biggest change to the EAP exemption is the minimum salary requirement for employees. Beginning Dec. 1, 2016, the employee must be compensated on a salary basis of at least $913 per week ($47,476 annually) to qualify for the EAP exemption. Th is more than doubles the previous salary threshold of $455 per week ($23,660 annually). the new regulations also impact another, albeit smaller, class of employees: highly compensated employees (HCEs). HCEs are those employees earning a minimum of $100,000, who are exempt from overtime requirements. the HCE minimum salary exemption will increase to $134,004 under the new regulations.
The new implementing regulations also include a new provision that allows employers to make up the difference between an employee’s regular salary and the new minimum thresholds. the new standards allow up to 10 percent of an employee’s salary to come from non-discretionary bonuses, incentive payments and commissions, so long as these “make-up” payments are made at least quarterly.
Finally, the FLSA now includes automatic adjustments to the salary thresholds. Every three years, the minimum salary thresholds will be adjusted to the 40th percentile of full-time salaried workers in the lowest-wage census region. For HCEs, the minimum salary threshold will adjust to the 90th percentile of full-time salaried workers nationally. the first automatic adjustments will be effective Jan. 1, 2020, so employers should be aware of these adjustments and periodically review salaries for employees covered by these exemptions.
Despite all of these changes, many FLSA regulations remain the same. the job duty requirements set forth above are unchanged. Also, employers do not have to convert employees from salary to hourly or require them to “punch-in and punchout” simply because their salaries fall short of the new thresholds. Although employers are required to maintain accurate hourly work records for newly covered individuals, employers do not have to change the method by which they track those employees’ hours or how pay is calculated.
For more information, the United States Department of Labor has issued a revised question and answer sheet addressing these changes and other overtime rules at www.dol.gov/whd/overtime/final2016/faq.htm. More detailed guidance on the changes can be found at https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf.