REGULATION UPDATE! New Minimum Salary Level for Exempt Employees
Final Overtime Rule Released
by Jean Seawright
On September 27, the U.S. Department of Labor (DOL) published its much-anticipated final “Overtime Rule” updating and revising Title 29 of the Code of Federal Regulations, Part 541, which sets forth rules for employers to claim an overtime exemption under Section 13(a)(1) of the Fair Labor Standards Act (FLSA). Commonly referred to as the “white collar exemptions,” this section of the FLSA exempts from overtime any employee employed in a bona fide executive, administrative, or professional (“EAP”) capacity.
The final rule revises the regulations under Part 541 by raising the salary level test from a guaranteed minimum salary of $455 per week ($23,660 annualized) to $684 per week ($35,568 annualized), effective January 1, 2020.
In addition to increasing the salary level from $23,660 to $35,568, the final rule also:
— Allows employers to include nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new minimum salary amount, provided the bonuses and incentive payments are paid annually or more frequently.
— Increases the total annual compensation level for Highly Compensated Employees (HCEs) from $100,000 to $107,432, of which $684 must be paid weekly on a salary or fee basis.
— Establishes special salary levels for certain U.S. territories and an updated base rate for employees in the motion picture producing industry.
Additionally, the DOL reaffirmed its intent to update the standard salary level and HCE total annual compensation threshold more regularly in the future using standard notice-and-comment rulemaking procedures.
The final rule officially rescinds the 2016 final rule that was invalidated by a U.S. District Court, but remained “on the books.” Had the 2016 rule been implemented, it would have raised the guaranteed salary level to $47,476 with automatic increases every three years. The official rescission of the 2016 final rule means that the 2004 rule (the one currently in effect) will remain operative if the current final rule is struck down at any point.
The following questions and answers will help you prepare for the coming changes and properly classify your positions as nonexempt or exempt from overtime under the revised DOL regulations.
QUESTION 1:
I own a small business (or run a nonprofit agency).
Is my business covered under the revised regulations?
Yes, more likely than not! There are no special exceptions in the FLSA for small businesses or nonprofit agencies. A business enterprise OR its individual employees can be covered under the FLSA and are, therefore, subject to the revised regulations.
A business enterprise is covered by the FLSA if it has an annual gross volume of sales made or business done totaling $500,000 or more. This is referred to as "enterprise coverage."
Individual employees are covered if they engage in interstate commerce or in the production of goods for commerce. This is called "individual coverage." To meet this requirement, an employee's work need only involve or relate to the movement of persons or things across state lines, including, for example, such tasks as making out-of-state phone calls, receiving or sending interstate mail or electronic communications, and ordering or receiving goods from an out-of-state supplier.
Most employees will be covered by the individual coverage test even when enterprise coverage does not apply. Employees who work at hospitals, businesses that provide medical or nursing care for residents, schools, and public agencies are always covered.
If your business and employees are not covered by the FLSA, there may be state wage and hour regulations your company must abide by, including, among others, salary requirements and/or duties tests that must be met in order for a position to be classified as exempt from overtime.
QUESTION 2:
What overtime exemptions are covered by the new regulations?
The final Overtime Rule impacts four of the five exemptions found under Sections 13(a)(1) of the FLSA and addressed in the Part 541 regulations. These exemptions cover bona fide executive, administrative, professional, computer, and outside sales employees. Collectively, these exemptions are referred to as the "white collar exemptions” and the first three (executive, administrative, and professional) are referred to as the "EAP exemptions.” (Note: The outside sales exemption is not affected by the final Overtime Rule because it does not require the payment of a guaranteed salary.)
To qualify for an EAP exemption, three requirements must be met:
— The employee must be paid a guaranteed salary that is not subject to reductions based on the quantity or quality of work (the "salary basis test").
— The amount of the salary paid must meet a minimum specified amount (the "salary level test").
— The employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the "duties test"). The duties tests are different for each EAP exemption.
The revised regulations do not address the duties test or the salary basis test; only the salary level test.
The EAP overtime exemptions are the only ones affected by the final Overtime Rule. Other FLSA overtime exemptions, such as those for retail employers (a.k.a., Section 7(i) exception), automobile dealerships, and agricultural entities, remain unchanged.
Likewise, the final Overtime Rule does not affect employees in nonexempt positions, including, for example, those who are paid by a piece rate, straight commissions, hourly rate, salary, draw, or any combination thereof. Employees in positions classified as nonexempt would remain eligible for overtime regardless of the method used to pay them.
QUESTION 3:
We don't have any employees who earn less than $35,568 per year.
Is there anything else we should consider?
Yes! You should determine if you have any employees in positions classified as exempt from overtime who do not meet the "duties tests" and consider correcting the misclassification using a carefully planned strategy.
Inadvertent misclassification can occur when an employer pays a guaranteed salary to a worker and is unaware that specific job duties tests must be met. This often occurs when employees are given a supervisory or management title.
Although it's a common misconception, job titles never determine the exempt status for a position; nor does the payment of a salary. To qualify for a white collar overtime exemption, in addition to receiving the guaranteed minimum salary amount, an employee must also meet the duties tests for the exemption being claimed.
If positions at your company have been designated as "salaried" without regard to the duties tests under an EAP exemption or if duties have changed over time and you are uncertain if a position qualifies for an overtime exemption, we recommend a comprehensive audit of compensation practices to ensure that positions are properly classified as exempt or nonexempt under state and federal regulations.
See what is covered in an HR compliance audit HERE.
If necessary, we can assist with a strategy for reclassifying positions from exempt to nonexempt, taking into consideration the particular circumstances, such as the salary rate, current recordkeeping practices, hours worked by the individual(s), and potential overtime liabilities.
QUESTION 4:
What are the tests for each EAP exemption?
To determine if a position qualifies for an EAP exemption, you must have accurate information about the precise job duties and percentages of time spent performing each duty. The DOL maintains that exemptions from minimum wage and overtime requirements under the FLSA "are to be narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit." (Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 [1960])
A summary of the tests for each exemption can be found HERE.
Over many years, the DOL has generated volumes of information about each of the white collar exemptions in an effort to clarify enforcement practices and their interpretation of the tests. Nevertheless, confusion abounds and positions are routinely misclassified, which results in significant backwage liabilities for employers.
To help minimize risk, we can evaluate your positions and recommend the proper classification for each utilizing our knowledge of FLSA regulations, applicable state regulations, and government agency enforcement practices. Clients with questions and those who are interested in an audit of pay plans should call our firm for assistance.
QUESTION 5:
How does the nondiscretionary bonus and incentive pay option work?
Under the revised regulations, nondiscretionary bonuses and incentive payments (including commissions) can be used to satisfy up to 10 percent of the standard salary test requirement of $684 per week ($35,568 annualized) if the payment is made on an annual or more frequent basis. Employers may use any 52-week period, such as a calendar year, a fiscal year, or an anniversary year for this payment.
Under the FLSA, nondiscretionary and discretionary bonuses are defined as follows:
• Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation that employees are made aware of ahead of time to induce them to work more efficiently or effectively or to remain with the company. This includes, for example, bonuses awarded to employees for meeting profit, revenue, or production goals; attendance bonuses; and commission payments based on a fixed formula that is a percentage of a sale or service.
• Discretionary bonuses are not communicated to employees in advance. They function like "surprise" bonuses that are spontaneously awarded. To meet the definition of "discretionary," the decision to provide the bonus and the payment cannot be in accordance with any preannounced standards. The final Overtime Rule does not permit employers to use discretionary bonuses to satisfy the standard salary test requirement.
If you elect to use the new nondiscretionary bonus and incentive option, each pay period the exempt EAP employee must receive at least 90% of the standard (minimum) salary level (equivalent to $615.60 per week or $32,011.20 annualized).
If you use the bonus and incentive option and an employee fails to earn the amount necessary to bring total earnings up to the minimum required annualized salary amount of $35,568, you can make a final "catch-up" payment within one pay period after the end of the 52-week period to bring an employee's compensation up to the required level needed to preserve the exempt status. If you choose not to make the catch-up payment, the employee would be eligible for overtime pay for any overtime hours worked during the previous 52-week period. (In other words, the employee would lose the overtime exemption because the salary level test was not met.)
If the employee does not work for the entire period because he or she is newly hired after the start of the period, separates employment before the end of the period, or transfers out of the exempt position before the end of the period, catch-up payments must be made by the end of the next pay period following separation of employment or transfer to a nonexempt or non-incentive-eligible position.
QUESTION 6:
How does the Highly Compensated Employee (HCE) test work?
The HCE test is only available to employees whose primary duty includes performing office or nonmanual work. Essentially, it combines a high compensation requirement with a less-stringent duties test. To meet the HCE test, the employee must customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.
In addition, effective January 1, 2020, HCE employees must earn at least $107,432 in total annual compensation (increased from $100,000) and must receive at least the standard salary level each pay period on a salary or fee basis (equivalent to $684 per week), while the remainder of the employee’s total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
Employers are permitted to make a final “catch-up” payment during the last pay period or within one month after the end of the 52-week period to bring an HCE's compensation up to the required level. If the employee works for less than a full 52-week period, the employee can still qualify for the HCE exemption if he or she receives a prorated portion of the required annual compensation, based on the number of weeks of employment.
QUESTION 7:
Does the final Overtime Rule affect state wage and hour regulations?
No. The revised regulation pertains to the FLSA, the federal law addressing minimum wage and overtime obligations for covered enterprises and employees. The FLSA is enforced by the U.S. Department of Labor, a federal government agency.
Many states have their own departments of labor that enforce state regulations. Oftentimes, these regulations are more stringent than the federal regulations. In fact, many state regulations exist to fill voids in coverage under the federal law or to provider greater benefits to employees.
For example, in California, the current salary threshold for employees working for large employers is $49,920, and for those working for small employers it is $45,760. In 2023, California employees earning less than $62,400 will be eligible for overtime. In New York, current salary thresholds range from $43,290 to $58,500, depending on the type of employer and location.
Other states, including Washington, Maine, Massachusetts, and Pennsylvania, all have bills or proposals to increase the salary threshold well beyond the federal rate.
Employers should consider applicable state regulations when evaluating options for pay plan changes that may be necessary under the new federal regulation. In some cases, a state regulation will prohibit use of a particular pay plan that is acceptable under federal regulations or by employers in other states.
For example, the Fluctuating Workweek pay plan for nonexempt positions is outlined in FLSA implementing regulations; however, it is not permitted for use in some states. This pay plan involves the payment of a guaranteed salary to eligible nonexempt employees and half-time (vs. time-and-one-half) for all hours worked over 40* in a workweek.
Likewise, the overtime "exception" for retail establishments, commonly referred to as the "7(i) pay plan," is not permitted by some state agencies.
To minimize the risk of misclassifying workers under state regulations, before making pay plan changes, clients should call our office for consultation.
*Some states require payment of overtime if employees reach a daily threshold. In California, employers must pay overtime after 8 hours per day and double time after 12 hours per day to nonagricultural employees. In Alaska, Nevada, and Puerto Rico, employers must pay overtime after 8 hours per day. In Colorado, employers must pay overtime after 12 hours per day. If these daily thresholds are not met but the employee still works over 40 hours per week, overtime must be paid after 40 hours.
QUESTION 8:
We have positions that will no longer meet the salary level requirement in January.
What are our options?
There are several. The options for complying with the revised Part 541 regulations will depend on the affected employee's specific circumstances. Generally speaking, salaried workers will fall into one of three categories:
— Employees in nonexempt positions who maintain a time record and who are paid a salary plus overtime after working 40 hours in a workweek: No changes would be necessary for these workers.
— Employees in positions designated as exempt from overtime under an EAP exemption who, regardless of the salary amount, do not meet the duties tests under one of the EAP exemptions: Changes would be necessary since the duties test is not met. The position will need to be reclassified from exempt to nonexempt.
— Employees in positions designated as exempt from overtime under an EAP exemption who meet the duties tests, but are paid a salary below the minimum threshold level of $684 per week: Changes would be necessary to retain the overtime exemption. The salary would have to be increased to the minimum threshold level of $684 per week with or without a nondiscretionary bonus or incentive to offset up to 10 percent.
If you must reclassify a position from exempt to nonexempt because the duties tests are not met AND/OR it would be impractical to increase the guaranteed salary to the new threshold level, there are pay plan options. The most common options include:
— Retain the current salary rate, but limit the work schedule to ensure the employee does not work overtime during any week. Maintain accurate time records to meet the burden of proof.
— Convert the salary to an hourly rate based on 40 hours of work (or the number of hours the salary was intended to cover) and pay overtime at 1.5 times the regular hourly rate.
— Convert the salary to an implicit hourly rate adjusted downward so when the overtime is paid, total earnings remain as constant as possible.
— Pay a salary and adopt the Fluctuating Workweek pay plan (if permitted in your state) to calculate overtime.
— Explore options for other pay plans and overtime exemptions that may or may not involve a change in duties.
Regardless of the method used, employees in nonexempt positions must maintain an accurate time record.
Compensation changes should be carefully planned and communicated to minimize risk and confusion among affected employees. With the Overtime Rule set to take affect January 1, 2020, employers have limited time to evaluate positions and create a strategy for implementing compensation adjustments and position reclassifications.
Seawright & Associates is available to assist clients with evaluating position duties, determining proper FLSA classifications, identifying pay plan options, and developing a strategy for communicating and implementing any necessary changes.
If you have any questions, let us know.
Jean
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Jean Seawright
Seawright & Associates
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Maitland, Florida 32751
P: 407.645.2433, ext. 14
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