On May 18, 2016, the U.S. Labor Department (DOL) issued its new overtime rules. These new rules primarily address the trigger amount for exempting executive, administrative, professional, and computer employees from the Fair Labor Standards Act (FLSA). These exemptions are frequently referred to as EAP exemptions or white-collar exemptions.
Summary of major changes
- The changes go into effect on December 1, 2016.
- The EAP trigger amount for exempting employees will increase from $455 a week to $913 a week (from $23,600 to $47,476 annually).
- Up to 10% of the EAP trigger amount can be calculated by including nondiscretionary bonuses, incentive payments, and commissions so long as these payments are paid at least quarterly.
- The trigger amount for qualifying for the highly compensated employee (HCE) exemption will increase from $100,000 to $134,000 annually.
- The EAP trigger amount and the HCE trigger amount will be adjusted every 3 years. The first adjustment will be on January 1, 2020.
- No changes were made to the duties tests for the EAP exemptions.
- No changes were made to the federal minimum wage law nor the 40-hour trigger for overtime payments.
Two important things the FLSA does
For most people and businesses, the two most important things that the FLSA does is to set the minimum wage for employees and to define the length of the ordinary work week for employees. The current federal—and Alabama—minimum wage is $7.25. The ordinary work week is 40 hours. This means that, unless employees are exempt from the FLSA, they must be paid overtime (time and a half) for any hours over 40 they work.
These new regulations change neither the federal minimum wage nor the length of the ordinary workweek.
Exemptions from the FLSA
Currently, employees don’t have to be paid overtime for working over 40 hours a week if they are paid $455 or more a week ($23,660 annually) and fall into one of five categories:
- Administrative personnel.
- Computer employees.
- Outside sales representatives.
An employer can’t merely label a job as being in one of these categories to make the employee in that job exempt from the FLSA. Instead, there are certain tests for the validity of whether an employee is in one of the exempt categories. To put it another way, an employer can’t make an employee exempt by paying them on a salary basis instead of an hourly basis. Likewise, it’s not the job title nor the job description that makes a person an exempt employee. It is what they actually do as defined by the tests.
Although we won’t discuss all the tests in detail in this post, here are some general observations so that you can understand how the system works. Keep in mind that these are the current and “future” test elements because the new regulations didn’t change any of the current test elements.
Tests for the exempt categories
Currently, executives are exempt if they are (a) paid $455 or more a week and (b) meet both of the following requirements:
- Direct the work of at least two employees.
- Have the authority to hire or fire the supervised employees or have significant influence over whether the supervised employees are hired or fired.
Currently, administrative employees are exempt if they are (a) paid $455 or more a week and (b) meet both of the following requirements:
- Have the primary duty of performing office or nonmanual work related to the management or general business operations of an employer or the employer’s customers.
- Exercise discretion and independent judgment in matters of significance.
Currently, professionals are exempt if they are (a) paid $455 or more a week and (b) meet at least one of following requirements:
- Their work requires knowledge of an advanced field or learning customarily acquired by prolonged, specialized intellectual instruction and study.
- They work in a recognized field of artistic endeavor that requires originality and creativity.
- They work as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field.
Currently, highly compensated employees are exempt if they (a) are paid at least $455 a week, (b) are paid at least $100,000 for the whole year, and (c) regularly meet at least one of the tests of an exempt executive, administrative, or professional employee. The HCE exemption applies only to employees whose primary duties involve performing office or nonmanual work. Regardless of how much they may get paid, the HCE exemption does not apply to nonmanagement production-line workers or employees who perform work involving repetitive operations with their hands, physical skill, and energy.
What the new regulations do
Except for a few things which we’ll address a bit later in this post, you can understand the new rules by substituting, in the previous section, $913 for every time you see $455 and $134,000 for the one time you see $100,000.
Other than the amounts indicated in the previous paragraph, nothing in the new regulations changes the way in which non-profit or charitable organizations are affected by the FLSA.
Likewise, nothing in the new regulations changes the way in which educational institutions and teachers are currently affected by the FLSA. The FLSA currently exempts bona fide teachers; nothing in these new regulations changes that exemption. Current law addresses exemptions for academic administrative employees, and the new regulations don’t change anything in that regard.
Currently, outside sales representatives are exempt if they (a) are regularly engaged away from an employer’s place of business and (b) have the primary responsibility for selling products or obtaining orders for services. Currently, there is no minimum salary requirement for outside sales representatives; and the new rules don’t change this fact.
Employers who currently pay employees less than $913 a week, even if they are currently exempt, do not have to start paying those employees $913 a week, but they do have to start paying them overtime. Let’s see how that can work in terms of practical application.
Suppose the owner of a fast-food restaurant chain currently pays store managers $460 a week in salary. If a store manager works 10 hours over 40 hours during a week, he or she still gets paid only $460 a week. In short, the store manager is currently exempt from the overtime provisions of the FLSA.
Now what happens on December 1, 2016? The store manager can still be paid $460 a week; but if the store manager works 10 hours over 40 hours, he or she will have to be paid overtime for those 10 hours. Using the current base of $460 a week and dividing by 40, the manager is currently getting paid $11.50 an hour. So that means the store manager will have to be paid $17.25 an hour for each of the manager’s overtime hours—or $460 + $172.50 for the week.
So if the owner of the fast-food restaurant chain doesn’t want to increase the salary of store managers to $913 a week, the owner must first require—and this is very important—store managers to start clocking in and out, just as the other hourly employees do. Then the owner may—
- Not allow store managers to work overtime. In other words, store managers must be told to walk out the door when they reach 40 hours for a week. This is probably not a very practical solution for managing a fast-food restaurant.
- Ask the store managers to limit the number of hours worked overtime—to, let’s say, 10 hours. In other words, store managers must be told to walk out the door when they begin to reach 50 hours for a week.This gives the store manager a bit more flexibility with handling emergencies and other problems that may arise in the day-to-day operation of a fast-food restaurant and may be a bit more practical for managing a fast-food restaurant.
- Pay store managers overtime for any hours they work over 40 as the law requires. If the base salary is $460 a week, the store manager will have to work about 27 hours of overtime (67 hours for the week) before the weekly check reaches $913.
Warning about implementing solutions 1 and 2: You cannot tell employees to go off the clock at 40 hours—or even 50 hours. This violates the FLSA. So regardless of the policy of solutions 1 or 2, a store manager paid less than $913 a week must be paid overtime for any hours over 40—or any over 50. If the owner were to tell the store managers to go off the clock when they reach 40 or 50 hours, the owner will wind up paying the overtime anyway—in addition to a stiff fine.
These rules will dramatically change the dynamic for just about every business, but especially for any business with gross receipts of over $500,000. No wage-related rule change this big has been made since the 1970s, and even then it was not as dramatic. There will be some seriously challenging decisions for many businesses to make in the compensation field.
In fact, the DOL estimates that approximately 22.5 million employees may begin getting paid overtime on December 1, 2016.
Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.