The federal Fair Labor Standards Act (the “FLSA”) has governed the relationship between employers and employees since enacted in 1938 including establishing the 40 hour work week and a minimum hourly wage. It also governs when employees must be paid overtime.
The FLSA and the rules interpreting the statute set forth three tests to determine when an employee is exempt from the overtime pay requirement. Where one of the three tests fail, the employee must be paid overtime pay (time and a half) for any work in excess of 40 hours per week. The three tests are:
First, the employee must be paid a salary on a weekly or annual basis and not by the hour (the “salary basis test”).
Second, the employee must have executive, administrative or professional duties (which requires a complex and fact-based analysis outside the scope of this article).
Third, an employee must be paid more than a set minimum annual salary (the “salary level” test).
The U.S. Department of Labor recently issued a final rule that will drastically increase the minimum annual salary level set by the third test, from $23,660 to $47,476. Whether employees are managers or not, on December 1, 2016, employees making less than $47,476 will either have to be paid time and a half for any time they work over 40 hours in a week, or will have to be compensated more than that minimum amount. The salary level will also adjust automatically every 3 years.
The salary level is not random, but is based on the salary of the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region. The current Census Regions are the Northeast, the Midwest, the South, and the West. The Region with the lowest 40th percentile of earnings is the South, so that is the Region on which the salary level is currently based. However, the benchmark Region will change if a different Region has the lowest 40th percentile earnings. The DOL estimates that in 2020, when the salary level will again update, the salary requirement will increase from $47,476 to $51,168. The DOL has only updated the salary level requirement seven times since 1938, with the last update occurring in 2004.
As a part of the Rule, the DOL adopted new terminology. Previously, “exempt” employees were not eligible for overtime pay; they are now referred to as “overtime-ineligible.” ”Nonexempt” employees are now referred to as “overtime eligible.” In addition, and for the first time, employers will be able to include non-discretionary bonuses in calculating which employees are overtime ineligible, provided the bonuses are paid on at least a quarterly basis. Bonuses can count for up to 10% of the required salary level.
The change in the salary level requirement will affect around 4.2 million employees, and will have an estimated cost to employers of $295.1 million per year. The change is also expected to result in $1,189.1 million in income transfer from employers to employees. To make up for that cost, as a practical matter, employers may:
- raise the prices for the goods and services sold;
- strictly enforce a 40-hour work week;
- reduce the number of full-time positions and hire more part-time personnel;
- consolidate duties so that overtime ineligible employees take over duties that might otherwise cause overtime eligible employees to work more than 40 hours a week
- reduce employees’ base wages, but pay time and a half for hours over 40 hours a week, resulting in employees maintaining the same overall wage.
The Rule is over 500 pages long and has special rules and exemptions for highly compensated employees (who make over $134,004), teachers, school administration, lawyers, doctors, public sector employers, employees who report to elected officials, nonprofits not engaging in interstate commerce, the film industry, commissioned sales employees, truckers, seasonal workers, and computer personnel. If you have any questions about how this Rule will affect your organization, don’t hesitate to contact our office.
By: Dana L. Eismeier and Katherine McAuley
