The New FLSA Overtime Rule

The Fair Labor Standards Act (FLSA) requires employers to pay overtime compensation to employees who work more than 40 hours per work week. However, the law exempts bona fide executive, administrative, and professional employees from coverage. To qualify as exempt, employees must meet both a “salary test” and a “duties test.”

The Final Rule increases the salary threshold required for executive, administrative and professional employees to qualify as exempt from the law's overtime requirements. As of Dec. 1, to be exempt from overtime, such employees must earn a minimum salary of $913 per week, or $47,476 per year ' more than double the old requirement of $455 per week, or $23,660 per year.

The FLSA also has an exemption for “highly compensated employees” (HCEs). The Final Rule increases the required total compensation amount for HCEs from $100,000 per year to $134,004 per year. Of this amount, at least $913 per week must be in the form of a guaranteed minimum salary.

The salary threshold level for the overtime exemption for executive, administrative, and professional employees, as well as the HCE compensation level, will automatically update every three years, beginning on Jan. 1, 2020.

'It's D'j' Vu All Over Again'

The Final Rule did not change the “duties tests” that employees must meet to qualify as exempt from overtime under the FLSA. According to the DOL, the increased standard salary level and automatic updating mechanism will adequately prevent employees from being misclassified as exempt from overtime, including employees who meet the duties test, but who also perform “substantial amounts of overtime-eligible work,” such as operating cash registers and stocking shelves. Further, the DOL noted that changes to the duties test would disrupt employer operations.

Therefore, the following duties tests still apply to be exempt from overtime:

1. Exempt executive employees must still have the primary duty of managing the enterprise or a department or subdivision of the enterprise. They must also customarily and regularly direct the work of at least two employees and have the authority to hire or fire, or their recommendations as to the hiring, firing, or other change of status of other employees must be given particular weight.

2. Exempt administrative employees must primarily perform office or non-manual work directly related to the management or general business operations of the employer or its customers, and they must exercise discretion and independent judgment with respect to matters of significance.

3. Exempt professional employees must primarily perform work: a) requiring both advanced knowledge that is intellectual in character in a field of science or learning that is customarily acquired by a prolonged course of specialized intellectual instruction (such as doctors, lawyers, certified accountants, and engineers), as well as discretion and independent judgment; or b) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Computer systems analysts, computer programmers, software engineers or other similarly skilled workers in the computer field may satisfy the duties test, as well as employees who teach in a school system or educational institution.

4. HCEs must regularly perform at least one of the primary duties of an exempt professional, administrative, or executive employee, and they must perform office or non-manual work. For example, an employee may qualify as an exempt highly compensated executive if he or she customarily and regularly directs the work of two or more other employees but does not meet the other duties requirements for exempt executive employees.

'When You Come to a Fork in the Road, Take It'

The Final Rule presents employers with various choices to maintain the overtime exemptions, including the option to use nondiscretionary bonuses, incentive pay, and “catch-up” payments, to satisfy a portion of the new salary threshold for exempt executive, administrative, and professional employees.

It requires exempt executive, administrative, and professional employees to earn at least 90% of the standard salary level ($913 per week) each pay period. Nondiscretionary bonuses and incentive pay (including commissions) may comprise up to 10% of the new salary standard ($91.30 per week) for such employees, provided that the bonuses and incentives are paid on a quarterly basis or more frequently. Therefore, to meet the standard salary amount ($47,476 per year or $11,869 per quarter), exempt employees may be paid up to $1,186.90 in nondiscretionary bonuses/incentive pay per quarter (13 weeks x .10 x $913.00 = $1,186.90).

Nondiscretionary incentive bonuses are those tied to productivity or profitability and include bonuses based on a specific amount of profits generated, bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula.

In contrast, employers may not count discretionary bonuses toward the standard salary amount. With discretionary bonuses, the employer has the sole discretion to decide whether to award the bonus and set the amount of the bonus, and these decisions are not based on any preannounced standards.

However, HCEs are treated differently from exempt executive, administrative, and professional employees in this regard, and the Final Rule does not allow employers to count nondiscretionary bonuses and incentive payments toward HCEs' standard salary amount. Because commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation may already count toward almost two-thirds ($86,528) of the HCE total compensation requirement ($134,004 per year), the DOL decided that such payments may not also count toward their base salary threshold ($47,476 per year).

If an executive, administrative or professional employee does not earn enough in nondiscretionary bonuses or incentive pay in a given quarter to remain exempt, then employers may make quarterly “catch-up” payments of up to 10% of the standard salary level for the preceding 13-week period. Therefore, if an employee does not earn the full $1,186.90 in nondiscretionary bonuses/incentives (in- cluding commissions) in a given quarter, an employer can simply pay the difference (up to $1,186.90) no later than the next pay period after the end of the quarter. Catch-up payments only apply to the prior quarter's salary amount, that is, the quarter during which the employee's salary fell below $11,869.

Catch-up payments do not count toward the salary amount for the quarter in which they are paid. If an employer chooses not to make the catch-up payment and the employee falls below the salary threshold, the employee must be paid overtime for any overtime hours worked during the quarter.

The Final Rule explains nondiscretionary bonuses and catch-up payments as follows: Assume Employee A is an exempt professional employee who is paid on a weekly basis, and that the standard salary level test is $913 per week. In January, February and March, Employee A must receive $821.70 per week in salary (90% of $913), and the remaining $91.30 in nondiscretionary bonuses and incentive payments (including commissions) must be paid at least quarterly. If at the end of the quarter the employee has not received the equivalent of $91.30 per week in such bonuses, the employer has one additional pay period to pay the employee a lump sum (no greater than 10% of the salary level) to raise the employee's earnings for the quarter equal to the standard salary level.

However, awarding catch-up payments to meet the standard salary amount could disincentivize employees from working to receive nondiscretionary bonuses.

In contrast to executive, administrative and professional employees, quarterly “catch-up” payments do not apply to HCEs. They must earn the entire base salary amount of $913 per week during each pay period. Although the FLSA does provide for annual catch-up payments for HCEs, these payments only apply to the amount of their total annual compensation beyond the standard salary threshold ($86,528).

'If You Don't Know Where You Are Going, You Might Wind Up Someplace Else'

To avoid winding up in court or a DOL investigation, employers should consider the following when adapting to the Final Rule:

Determine which exempt positions will remain exempt. Employers should audit currently exempt executive, administrative and professional employees who earn between the current salary threshold ($23,660 per year) and the new salary threshold ($47,476 per year). To remain exempt from overtime, such positions will require a salary bump to $47,476 per year and must meet the duties test for the applicable exemption. Alternatively, employers may reclassify such employees as nonexempt and thus overtime eligible. Employers should also audit employees currently exempt as HCEs to confirm that will satisfy the updated compensation requirements. In light of these developments, it is also a good time for employers to audit all exempt positions to confirm that exempt employees are paid on a salary basis and that they satisfy the relevant duties test.

Inform affected employees and their managers of any changes. Employers should communicate with employees whose status will change to nonexempt from overtime and explain that the new rules require this change. Employers should train these employees how to keep accurate time records and explain that off-the-clock work is not allowed. Employers should also communicate with the supervisors of affected employees regarding these changes and requirements.

Adjust hourly wages. For employees now considered nonexempt from overtime, employers can base their new hourly rates on their previous salaries by reallocating earnings between the regular hourly rate of pay and overtime, so that their total earnings stay about the same. As with all nonexempt employees, the new hourly rates must not fall below the applicable minimum wage, which may vary by state.

Structure employee workloads and work time to suit business needs. Depending on its operations, a business may reallocate work among hourly employees to minimize overtime hours, increase work hours of part-time employees, or hire new employees to work regular work hours, which would decrease the business's overall overtime hours.

Track hours worked, comply with other FLSA requirements, and re-apportion nondiscretionary bonuses. Newly nonexempt employees will need to record accurately their time worked on the employer's time-keeping system. This must include all work time, including time spent working from home, e-mailing, or otherwise working remotely. Employers may prohibit employees from working overtime without prior approval. Although employers may discipline employees for working unauthorized overtime, employees must still record and be paid for all time worked, including unauthorized overtime. Further, when hourly employees receive a nondiscretionary bonus, the bonus must be apportioned back over the workweeks during which it was earned to calculate an adjusted regular rate of pay for overtime purposes. Additional pay is due for workweeks in which employees worked more than 40 hours during the relevant bonus period.

Non-profits may use volunteers. Under certain circumstances, non-profit volunteers who donate their time to religious, charitable, humanitarian or civic organizations as a public service are not covered by the FLSA and therefore, are not covered by the law's overtime requirements. However, employed individuals may not volunteer time for their own non-profit employer doing the same work for which they are employed.

Public sector employers may use compensatory time off. Public employers, including public higher education institutions, may use “comp time” instead of cash overtime for nonexempt employees who work more than 40 hours per week. Comp time must be provided at the same rate as cash overtime. Therefore, employees must earn at least one-and-one-half hours of comp time for each overtime hour worked. Comp time arrangements must be established before the work is performed and may be in a collective bargaining agreement, memorandum of understanding, or other agreement. Comp time agreements should be in writing and provided to employees in personnel regulations or handbooks. Most public employees may accrue up to 240 hours of comp time. However, employees engaged in public safety, emergency response, or seasonal activity (such as admissions counselors), may earn up to 480 hours of comp time.

Conclusion

To successfully adapt their business operations to the new overtime rule, employers should consult with experienced labor and employment counsel.

E. Fredrick Preis, Jr . and Rachael Jeanfreau are attorneys in the Labor & Employment Section of the Breazeale, Sachse & Wilson law firm, which represents management. They can be reached at [email protected] and [email protected], respectively.