What does the new FLSA rule mean to you and your business?
If your company has any employees, then you are likely familiar with wage and overtime pay rules under the Fair Labor Standards Act (“FLSA”) and the exemptions from those rules commonly referred to as the “white collar overtime exemptions.” The U.S. Department of Labor (“DOL”) announced on May 18, 2016 a final rule regarding changes to the payment qualifications for these “white collar overtime exemptions” which could significantly impact how your employees are classified and paid. Employers have limited time in order to comply as the new rule goes into effect December 1, 2016.
The FLSA is a federal law governing minimum wage, overtime pay, and other wage and hour issues. Currently, the federal minimum wage is $7.25 per hour and the overtime rate is 1½ times the employee’s regular pay for hours worked beyond 40 hours a week. These rules apply to the vast majority of employers and some states have enacted laws which go beyond the minimum standards described by the federal law.
Employees are classified as either exempt or non-exempt from the general rules of the FLSA to determine whether the employee is entitled to overtime pay. Nationwide, most employees are considered non-exempt. The classifications are summarized below:
- Exempt Employees: Paid set salary each week, not entitled to overtime, must meet job duties test
- Non-Exempt Employees: Paid for all hours worked, entitled to overtime, typically paid hourly
An employee is considered exempt from the FLSA (and not entitled to overtime pay) if that employee qualifies under an exemption. The most common set of exemptions, the “white collar overtime exemptions,” include the executive, administrative, and professional exemptions. Each of these exemptions generally require that the same tests be met including:
- Salary Basis Test: Employee is paid fixed salary for each pay period
- Salary Level Test: Employee is paid salary of $455 per week (the current rule)
- Duties Test: Employee is engaged in duties described in the executive, administrative, and professional exemptions
Further, highly compensated individuals performing office or non-manual work and who are paid total annual compensation of $100,000 or more (which must include $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard tests for exemption.
New FLSA Rules
Increased Minimum Salary Threshold
The new FLSA rule increased the minimum salary level of $455 per week ($23,660 annually) to $913 per week ($47,476 annually). This new threshold represents the 40th percentile of wages earned by workers in the lowest-wage census region in the US and will be re-determined in 3 years (expected in 2020).
Highly Compensated Individuals
The final rule also increased the annual salary level of $100,000 for highly compensated individuals to $134,004. This salary level represents the 90th percentile of wages earned by full-time workers in the US and will be re-determined in 3 years (expected in 2020).
Non-Discretionary and Incentive Payments
A new provision of the final rule allows for up to 10% of non-discretionary bonuses and incentive payments (including commissions) to be used to satisfy an employee’s standard salary level. These payments may be used only if they are paid no less frequently than quarterly (the rule does provide for some “catch-up” payments to be made).
In order for employers to comply with the new FLSA rules by the December 1, 2016 effective date, employers are encouraged to take the following steps:
- Employers should take steps to understand the changes and identify those employees which will be affected (employees may need to be reclassified as exempt or non-exempt).
- Employers may need to assess if their current payroll and timekeeping systems and processes can accommodate these new requirements.
- Employers may need to consider the impact on the company’s budget if the company decides to increase salaries to comply with the new rules or reclassifies its employees and begins paying overtime.
- Employers should also plan to coordinate communication with employees and management to the extent these changes might affect employee schedules.
Please contact us for any questions.