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DOL’s Final Rule on overtime pay for salaried employees

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Tips for compliance

The Fair Labor Standards Act (FLSA or Act), which sets forth the minimum wage and overtime law in America, guarantees a minimum wage for all hours worked in a workweek and overtime premium pay of not less than one and one-half times the employee’s regular rate of pay for hours worked over 40 in a workweek.    While these provisions of the Act apply to most workers, the FLSA does contain some exemptions.

In a Final Rule handed down on May 18, 2016, the U.S. Department of Labor (Department or DOL) revised FLSA regulations defining the exemption from overtime pay for executive, administrative, and professional employees.  These exceptions are commonly known as the “EAP” or “white collar” exemptions.  To be exempt from overtime pay, employees must meet certain minimum requirements related to their primary job duties and must be paid on a salary basis at not less than the minimum amounts specified in the regulations.  The Final Rule increased the minimum salary threshold for the EAP exemption to $47,476 annually, up from the present standard of $23,660 in place since 2004.

A bit of history

The FLSA became law on June 25, 1938.  The Act delegates to the Secretary of Labor the authority to define the terms of the overtime exemption.  In October 1938, the Department issued the first version of the regulations setting forth criteria for determining which employees were not entitled to time-and-a-half overtime pay when exceeding 40 hours in a workweek.  A minimum salary threshold has been part of the rules since the beginning.  The DOL has updated the salary level requirements seven times since 1938.

On March 13, 2014, President Obama signed a Presidential Memorandum directing Labor Secretary Thomas Perez to update the regulations defining which salaried workers are covered by the FLSA’s overtime standards.  Increasing the minimum salary threshold was the primary goal from the beginning.  DOL issued a Notice of Proposed Rulemaking (NPRM) to update the regulations on July 6, 2015, after several missed release dates, and requested comments from interested parties during a 60-day public comment period.  On behalf of the restaurant industry, Missouri Restaurant Association and the National Restaurant Association weighed in.

Most expected release of the Final Rule in late summer of 2016.  In April of this year, MRA advised its members to expect the directive to be handed down much earlier than previously expected, possibly as early as May 16, 2016.  We didn’t miss the release date by much.  The Department’s Final Rule “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees” was issued on May 18 and became law when published in the Federal Register on May 23.  The effective date is December 1, 2016.  The law can be condensed into four bullet points.

The DOL Final Rule on Overtime:

  • Guarantees time-and-a-half overtime pay to any salaried employee earning under $47,476 a year ($913 a week) and who works more than 40 hours in a workweek.
  • Automatically updates the salary threshold every three years, tying it to the 40th percentile of full-time salaried workers in the lowest-income Census region (currently the South).  The first update would be January 1, 2020.  Furthermore, the DOL projects a salary threshold of $51,000 by January 1, 2020.
  • Makes no changes in the duties tests used to determine whether a salaried employee above the threshold is considered exempt from overtime pay.
  • For the first time, allows certain bonuses and incentive payments to count toward up to 10% of the new salary level if the payments are made on at least a quarterly basis.

While the bullet points are accurate and succinct, they also serve to oversimplify the requirements of the FLSA.  Compliance with the “Fair Labor Standards Act of 1938, As Amended,” the Act’s formal name, is far from simple.  Accordingly, MRA presents tips for complying with the changes contained in the Department’s recent Final Rule, as well as the FLSA as it existed before those changes.

Tip # 1:  Become familiar with the terms “nonexempt” and “exempt” as the DOL uses them.  In an attempt to address concerns that the terms exempt and nonexempt “were not sufficiently descriptive or intuitive,” the DOL introduced the terms “overtime-protected” and “overtime-eligible” as synonyms for nonexempt.  Employees who are nonexempt, overtime-protected, or overtime-eligible must receive time-and-a-half overtime pay when working more than 40 hours in a workweek.

Similarly, the Department introduced “not overtime-protected” and “overtime-ineligible” as terms synonymous with exempt.  Employers are not required to pay the overtime premium to workers who are exempt, not overtime-protected, or overtime-ineligible even when the worker’s time exceeds 40 hours in a workweek.

Tip # 2:  Remember the other two of the three basic tests to claim the EAP exemption.  For an employer to claim a white collar exemption for an employee, three basic tests must be satisfied:  the salary level test, the salary basis test, and the duties test.

The salary level test has undoubtedly controlled the conversation surrounding the Final Rule.  However, payment of the specified minimum salary amount, $913 per week effective December 1, is not alone sufficient to qualify an employee for the white collar exemption.  The Department’s outreach during the recent public comment period made clear that many employers and employees mistakenly believe that compliance with the salary level test automatically disqualifies an employee from overtime compensation.  Such misconceptions are not new.  In a 1949 report, the Department noted “the failure of some employers to realize that salary is not the sole test of exemption.”

Companies should be aware there is no special salary level for white collar employees working less than full-time.  Employers, however, can pay EAP employees working part-time a salary of less than the minimum salary threshold and comply with the FLSA so long as the salary equals at least the minimum wage for all hours worked and the employee does not exceed forty hours in a workweek.

Generally, for a company to claim an overtime exemption for an employee, that employee must be paid on a salary basis.  The salary basis test requires an employee to regularly receive a predetermined amount of remuneration, i.e. the salary, for each workweek.  The salary cannot be reduced because of variations in the quality or quantity of the employee’s work.  Further, an exempt employee must generally receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.

Salary deductions are permissible when an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability, or when an exempt employee is absent for 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 paid sick leave.  If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.

Exempt employees must also satisfy the duties test to qualify for any of the EAP exemptions.  Separate duties requirements exist for executive, administrative, and professional employees.  The standard duties test, in place since 2004, focuses on an employee’s primary responsibility.  “Primary duty” means the principal, main, major, or most important duty that the employee performs.  The Department estimates that 732,000 white collar salaried employees currently making between $455 and $913 per week do not meet the duties test and should be classified as overtime-eligible, but their employers inappropriately fail to recognize them as such.

To qualify for the executive exemption under the standard test, all of the following job duties must be satisfied:

  • The employee’s primary duty must be managing the enterprise in which the employee is employed, or managing a customarily recognized department or subdivision of the company;
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • The employee must have authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.

To qualify for the administrative exemption under the standard test, all of the following job duties must be satisfied:

  • The employee’s primary duty must be 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
  • The employee’s primary duty must include the exercise of discretion and independent judgement with respect to matters of significance.

To qualify for the professional exemption under the standard test, all of the following job duties must be satisfied:

  • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and requires the consistent exercise of discretion and judgement;
  • The advanced knowledge must be in a field of science or learning that has a recognized professional status; and
  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction, which means specialized academic training is a standard prerequisite for entry into the profession.

Tip # 3:  Focus on weekly pay, not the annual salary.  The minimum salary threshold is a weekly requirement and employers should be certain that employees for whom they intend to claim a white collar exemption are paid at least $913 per week.  If there are weeks where employees do not earn at least this amount, they must receive overtime pay for time worked in excess of 40 hours for those weeks.  See, however, tip # 4 below concerning an exception for nondiscretionary bonuses.

Tip # 4:  Understand the exception for nondiscretionary bonuses and be careful.  An exception to the $913 per week requirement allows employers to count nondiscretionary bonuses, including incentive payments such as commissions, toward up to 10% of the threshold and lower the weekly pay obligation to $821.70.  Be careful.

Bonuses must be paid at least quarterly, and must increase the employee’s average pay for that quarter, defined as a period of 13 consecutive weeks, to at least $913 per week.  If the employer makes a miscalculation resulting in an employee receiving less than an average weekly salary of $913, the employee must be classified as overtime-eligible for that entire quarter and receive time-and-a-half overtime pay for hours worked in excess of 40 in any workweek during the quarter.

If an employee does not earn enough in nondiscretionary bonuses to raise their average weekly pay during the quarter to a minimum of $913, the Department permits a “catch-up” payment after the end of the quarter.  The employer has one pay period in the subsequent quarter to make up for the shortfall (but only up to 10% of the standard salary level for the preceding 13-week period).  Any such catch-up payment will count only toward the prior quarter’s salary amount and not toward the minimum salary for the quarter in which it is paid.  If the employer chooses not to make the catch-up payment, the employee is entitled to overtime pay for any hours worked in excess of 40 in any workweek during the quarter.  Some businesses pay significantly larger bonuses; however, the amount attributable toward the minimum salary threshold for the EAP exemption is capped at 10% of the required salary amount.  To satisfy the salary level test, employees must be paid at least $821.70 each week.  The amount of the nondiscretionary bonus, no matter how large, does not change the minimum weekly amount.

Nondiscretionary bonuses are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company.  Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula.  Nondiscretionary bonuses are generally based on preannounced criteria that have been communicated to the employee in advance and which the employee understands.  By contrast, discretionary bonuses are those for which the decision to award the bonus, and the bonus amount, is at the employer’s sole discretion and not in accordance with any preannounced standards.  Only nondiscretionary bonuses count toward meeting the minimum salary threshold, and even then only up to 10% of the requirement.

Finally, employers should devise a policy to compensate properly employees who leave before the end of a quarter.  Make sure the final bonus raises total pay to at least $913 per week worked.

Tip # 5:  Consider the DOL-recommended cost-neutral formula.  The Department provided a cost-neutral approach employers can use to keep annual earnings the same for employees currently receiving a salary below $913 per week.  Assuming you have an accurate estimate of the hours they work, you can account for the overtime pay in their hourly wage.  Here’s the DOL-recommended formula:

                                          Weekly Salary                                        
[40 hours + (Overtime Hours Worked Per Week x 1.5)]

Here’s how the formula would work for an employee who regularly works 48 hours per week and earns a weekly salary of $825.

[40 hours + (8 Overtime Hours x 1.5)]
=  $15.87 per hour

The employee’s overtime rate is $23.81 ($15.87 x 1.5).  Therefore, in a 48 hour workweek, the employee would earn $825.28 under the DOL’s cost-neutral formula (40 hours @ $15.87 plus 8 hours @ $23.81).

Tip # 6:  Plan on the December 1 effective date remaining in place and communicate payroll changes to employees at the earliest possible moment.  Changes of this nature are often stressful, for employers as well as employees, and additional time to adjust will likely be appreciated.  Some employees may move from salaried status to an hourly position.  Depending on hours worked, this change could result in an employee earning less than before.  Employers should be aware that Missouri law requires a notice of not less than 30 days for pay decreases.

There has been considerable conversation about bills introduced in Congress to repeal, delay, or modify the provisions of the Final Rule.   However, such legislation, if passed, would certainly be vetoed by the President.  On September 21, two separate lawsuits were filed in Texas federal court against the Labor Department to challenge the provisions of the Final Rule.  One suit was brought by attorneys general of 21 states, though not Missouri.  The second lawsuit, was filed by a coalition of 50 business groups led by the U.S. Chamber of Commerce.  MRA will keep you apprised of the progress of the legislation and the lawsuits.  We encourage our members to not let these events divert their attention away from preparation for the Final Rule’s December 1 effective date.

Tip # 7:  Look at the calendar – December 1, 2016, is a Thursday.  Considering the day on which your workweek ends, when does it make sense for your business to make the change?  Are you prepared to properly calculate pay for employees exempt from overtime for part of that week and overtime-eligible for the remainder?

It may make sense to make the change the previous week – the workweek that includes Thanksgiving Day.  Many restaurants close for the holiday, making it less likely that newly overtime-eligible employees will work overtime that week.

Tip # 8:  Do not confuse overtime pay with compensatory (comp) time.  The FLSA mandates that overtime-eligible employees must receive overtime pay for hours worked over 40 in a workweek at a rate not less than one and one-half times their regular rate of pay.  The use of comp time in place of overtime pay is limited by the Act to a public agency that is a state, a political subdivision of a state, or an interstate governmental agency.  Private employers cannot satisfy their overtime obligations by providing comp time.

In conclusion, please be aware the DOL’s Final Rule on overtime is 508 pages in length; therefore it is impossible for this article to include the entirety of its content.  MRA encourages readers to consult competent legal counsel regarding compliance with the FLSA as amended by the recent DOL Final Rule.

Author: MRA


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