A Look at the New Department of Labor Overtime Rule

With this new rule, it seems like a good time to go back to the basics and review what the FLSA requires of employers, what liability can result from not complying with the FLSA, and what you can do to avoid liability and make sure your exempt employees are really exempt.

On December 1, 2016, most of your company’s exempt employees will need to earn almost twice as much as they do now if they are to remain exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act, more commonly referred to as the FLSA.  The United States Department of Labor--the DOL--has increased the salary level from $455/week to $913/week and $23,660/year to $47,476/year.  These amounts will be increased every three years effective January 1, 2020.  

What is the FLSA? The FLSA was enacted in 1938 to ensure that employees were adequately compensated for their work.  The law established a 40 hour work week, a minimum hourly wage, and a requirement that employers pay time and a half for all hours over 40 actually worked per week.  The FLSA also requires employers to maintain timesheets for its non-exempt employees, to provide equal pay for equal work and to post FLSA signage in the workplace.  The DOL enforces the FLSA and adopts rules, like the new overtime rule, to implement the FLSA.    

The FLSA provides an exemption from the minimum wage and overtime requirements for the executive, administrative and professional staff of an organization.  These employees are commonly referred to as “exempt” employees and include outside salespersons and highly skilled computer professionals--computer systems analysts, programmers and software engineers.

Liability Under the FLSA When Congress enacted the FLSA, it wanted employers to take the law seriously and so the law includes provisions that make violating the FLSA costly for employers.  Employers who don’t pay a non-exempt employee the minimum wage, or who don’t pay overtime to non-exempt employees, or who don’t maintain timesheets for their non-exempt employees are subject to liability for back pay, an equal amount as liquidated damages, civil penalties in some cases and payment of the employee’s attorneys’ fees.  Damages can be assessed for up to three years of violations.  Moreover, the FLSA exemptions are very narrowly construed, which means that if an employer misclassifies an employee as exempt, the employer can be subject to liability for unpaid overtime and other damages.  Therefore, properly classifying your employees as exempt or non-exempt is critical to avoiding liability under the FLSA.    

Who is an Exempt Employee? In most cases, an employee is considered an exempt employee only if she meets all of the following three tests:

1. Salary Basis Test:  An exempt employee must be paid a predetermined and fixed salary.  Because of this test, an exempt employee can be expected to work more than 8 hours a day to complete their tasks; on the other hand, an exempt employee is not to be docked pay if he works less than a full day.  Over the years, it has become customary for many employers to overlook both the “duties” test and the “salary level” test for purposes of determining whether an employee is an exempt employee or not and instead, base an exempt determination on whether or not an employee is compensated by salary or by an hourly rate.  Employers will often say that an employee is exempt because they receive a salary.  The new DOL overtime rule reminds employers that the “salary basis” test is only one of three that must be satisfied in order for an employee to be considered an exempt employee. 

2. Duties Test.  The DOL has not changed the basic “duties” test for determining whether an employee is an exempt or non-exempt employee.  Consequently, the following tests still apply to determine whether someone’s duties constitute executive, administrative or professional duties: 

  • An executive employee must have as his/her primary duty the management of at least a subdivision of an enterprise which includes the supervision of at least two employees and the authority to make hiring and firing decisions;
  • An  administrative employee must have as his/her primary duty office or non-manual work directly related to the operations of the employer or its customers and must have the responsibility to exercise discretion and independent judgment with respect to significant business matters; and
  • A professional employee must have as his/her primary duty work requiring specialized knowledge acquired through prolonged education and the work must require the consistent exercise of discretion and judgment.  Skilled computer employees--computer systems analysts, programmers and software engineers--are considered professional employees. For purposes of determining whether an employee meets one of these three tests, the job description for the position that the employee is employed in is the critical factor.  Make sure you have a job description for each of your employees that accurately reflects the duties, skills and minimum education required for the position in which they are employed.  Make sure that job titles and job descriptions match up—if you have three Administrative Assistants, then all three should have the same job description.  Also, if one of your three Administrative Assistants is classified as non-exempt, then all three should be classified as non-exempt.  If your three Administrative Assistants are classified differently because they have different duties and responsibilities, then they should have different job titles with job descriptions that accurately match the differences in their responsibilities.

3. Salary Level Test. Until the new DOL rule, employers tended to overlook this test, which was easy to do because the salary level was so low--$455/week or $23,660/year.  Most exempt employees earned this much.  The salary level has now been set at the standard salary level equal to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South):  $913/week and $47,476/year.  For purposes of determining whether an employee earns at least $47,476 per year, nondiscretionary bonuses, incentives and commissions can count towards up to 10% of the required salary level, as long as employers pay those amounts at least quarterly.  A bonus is non-discretionary if either the fact of the bonus or the amount of the bonus is promised.  For example, an employer who promises a $500 bonus if business is good has established a non-discretionary bonus since the amount of the bonus has been promised; likewise, an employer who promises a bonus to all employees at the end of the year has established a non-discretionary bonus because the payment has been promised.

Special Rules for Salespersons

“Outside Salesperson” Exception to the Salary Level TestOutside salespersons are exempt employees regardless of amount earned. This means that these employees are considered exempt employees even if they do not earn at least $47,476/year.  To qualify as an outside salesperson, the employee must regularly and consistently work off-site and must have as his/her primary duty the responsibility for making sales or securing orders for services or the use of facilities. 

Inside Salespeople: Inside sales personnel are non-exempt employees based upon their job duties, not because of the new salary level test.  If you are not already paying your inside sales staff on an hourly basis, subject to overtime and minimum wage requirements, then you should do so.  

Tips for applying these new rules to your organization:    

1)Prepare a spreadsheet of all of employees that are currently classified as exempt, categorized by job title.

2)Remove from your report: Outside salespersons—they are exempt even if they make less than $47,476 and Inside salespersons—they are non-exempt employees  

3)With your remaining employees, review their job descriptions and determine whether their job duties match the description of an executive, administrative or professional employee.  If they are not really exempt based upon their duties, they should be re-classified as non-exempt.  

4)If you determine that you have employees who receive a salary and fulfill the duties of an executive, administrative or professional employee, but are paid less than the new salary requirements, then you need to determine whether you can increase their salaries to meet the new DOL threshold.  If you cannot do so, then those employees need to be re-classified as non-exempt and they must be paid overtime for hours actually worked over 40 per week. 

Importance of time sheets.  The law requires that you maintain accurate time records for your non-exempt employees.  Some states require that you maintain them for your exempt employees too.  If you don’t use timesheets, now is the time to start.  

ContactMaureen A. Murphy, Partner, Kopon Airdo, LLC, mmurphy@koponairdo.com; 312-506-4475

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