More than a year after it issued its first proposed rule, on Wednesday, May 18, 2016, the U.S. Department of Labor (“DOL”) released its final regulations governing overtime exemptions under the Fair Labor Standards Act (“FLSA”). These regulations take effect on Dec. 1, 2016, and are designed in large part to increase the number of employees eligible to receive overtime compensation by decreasing the number of employees who are exempt from the overtime compensation requirements of the FLSA. Although the new regulations will affect businesses of all types, the retail and hospitality industries are expected to be the most impacted.
There is much political wrangling over these new regulations, and it is uncertain if they will take effect in current form, in amended form, or at all. However, employers are wise to anticipate the survival of the regulations as currently drafted and prepare compliant compensation programs and practices.
The two most common exemptions impacted by the new regulations are the so-called “white-collar” exemptions for “executive” and “administrative” employees. To qualify for one of these “white-collar” exemptions, an employee must be paid over a specified dollar amount on a salary-basis and must exercise certain duties. The DOL did not amend the regulations related to the duties required for these exemptions, and the duties requirement will not be discussed in depth here.[1] The significant amendments made by the DOL are to the salary requirements of these exemptions.
Currently, to qualify for a “white-collar” exemption, an employee must be paid a salary of not less than $455 per week ($23,660 per year) – a threshold that was established in 2004. As of Dec. 1, 2016, the salary threshold doubles to $913 per week ($47,476 per year). Under the current regulations, an employer has not been allowed to use commissions, non-discretionary bonuses, or incentive payments to satisfy the minimum salary requirement. In a concession to business interests, the new regulations allow up to 10 percent of the salary threshold to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made at least on a quarterly basis. This allows a quarterly look-back for employers whose pay scheme includes incentives, commissions or bonuses. However, the employer must make up any shortfall each quarter to maintain the exemption. There is no provision for an employer to make up any shortfall at the end of the year.
The new regulations provide that the threshold salary will automatically increase every three years and will not require specific rule-making (i.e., will increase without allowing public comment). The DOL will post publish the new salary level 150 days before the effective date. The first increase will occur on Jan. 1, 2019, with the new rate being published beginning Aug. 1, 2019. The DOL estimates that the salary level will increase to $51,168 for the first automatic adjustment.
Employers must be mindful that the white-collar exemptions also require more than just a minimum salary. The guaranteed component of the salary must be paid on a “salaried-basis.”[2] “Salary-basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. Subject to certain exceptions (listed below), an exempt employee must receive the full guaranteed salary for any week in which the employee performs any work, regardless of the number of days or hours worked. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Also, if the employer makes deductions from an employee’s predetermined salary because of the operating requirements of the business, that employee is not paid on a “salary-basis.” If the employee is ready, willing and able to work, deductions may not be made for time when work is not available during a portion of a workweek.
An employer is allowed to make certain deductions from an employee’s guaranteed salary without losing the exemption for the employee. An employer does not have to pay an employee the guaranteed salary for any workweek in which the employee performs no work. Partial deductions from the guaranteed salary are permissible when an exempt employee:
- is absent from work for one or more full days for personal reasons other than sickness or disability;
- for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
- to offset amounts employees receive as jury or witness fees, or for military pay;
- for penalties imposed in good faith for infractions of safety rules of major significance; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions;
- in the initial or terminal week of employment; or
- for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.
Another exemption which employers commonly enjoy is for outside salespersons. The outside sales exemption does not have a minimum compensation component and is based entirely on the duties performed. The new regulation amend the provisions for this exemption.
In addition to the pure economic consequences, the new regulations create other issues and decisions for employers:
- Increase salaries above threshold versus converting from salaried to hourly
- Establish employees as non-exempt salaried employees and control overtime costs using the fluctuating workweek method for calculating overtime
- If conversion to hourly, determining new hourly rates to account for hours expected to exceed forty in a workweek
- Reducing or discontinuing benefits, or passing more costs to employees, to maintain or reduce human capital costs
- Hiring additional employees to alleviate any need for overtime work versus the compensation and benefit costs of hiring additional employees
- Loss of scheduling flexibility for mid-level management employees previously compensated as exempt
- Reliably recording hours for employees with flexible work schedules
There are no “one-size-fits-all” solutions for any of these issues. Subject to satisfying the minimum requirements, much discretion is left to employers. There are also other exemptions or methods of calculating overtime compensation provided by the FLSA that may benefit certain businesses. An experienced labor and employment attorney can guide clients through these myriad of regulations to develop a compensation program that serves the business needs of the client and complies with the new regulations.
[1] The “duties” standards have not changed.
“Executive”
- Primary duty is management of the enterprise or of a customarily recognized department or subdivision;
- Customarily and regularly directs the work of two or more other employees; and
- Has authority to hire or fire other employees or provide recommendations as to the hiring, firing, advancement, promotion or other change of status of other employees given particular weight.
“Administrative”
- Primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
[2] The new regulations do not amend the current definition of “salary-basis:”