The United States Department of Labor (“DOL”) published its updated Fair Labor Standards Act (“FLSA”) overtime regulations on May 18, 2016. The new regulations increase the salary requirements for employees who are exempt under the FLSA—and, thus, not entitled to overtime wages. As discussed in our May 2016 issue of the Employment Law Alert, the new regulations define and  limit  the  use  of  FLSA  exemptions  for  Executive, Administrative, Professional, Outside Sales and Computer Employees by changing the threshold salary requirements for the white collar exemption under the FLSA. The DOL has not updated these salary requirements since 2004, allowing employees who made $455 per week (approximately $23,660) to qualify for the white collar exemption under the FLSA. In the final rule, this salary requirement is now doubled—entitling many employees who make less than $913/week (or $47,476) per year to be paid overtime wages. The new rule also increases the salary requirements for Highly Compensated Employees from $100,000 per year to $134,004 per year. These new requirements go into effect on December 1, 2016.1

Since 1940, the DOL’s regulations have generally required that in order to be exempt from overtime under the FLSA under the exemptions for Executive, Administrative and Professional Employees, the worker must:

  1. be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed “salary basis test”);
  2. the amount of salary paid must meet a minimum specified amount (“salary level test”); and
  3. the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).2

The new regulations update the salary requirements in this analysis by setting the minimum salary, as of December 1, 2016, to $913/week ($47,476 per year) for employees for Executive, Administrative and Professional Employees. The regulations, however, make no changes to the duties test.   As a result, the following elements  must generally be satisfied for employees to qualify under each of these exemptions:

Executive Exemption:

  • The employee must be paid on a salary basis, at a rate not less than $913 per week ($47,476 per year);
  • The  employee’s  primary  duty  must  be  managing  the enterprise,  or  managing  a  recognized  department  or subdivision;
  • The employee must regularly direct the work of at least two or more full-time employees (or their equivalent);3 and
  • The employee must have authority to hire or fire employees, or his/her suggestions concerning hiring, firing, advancements, promotions or other staff changes must be given particular weight.

Administrative Exemption:

  • The employee must be paid on a salary basis, at a rate not less than $913 per week ($47,476 per year);
  • The employee’s primary work duty must be performing office or non-manual work that is related to management or general business operations; and,
  • The employee’s primary duty must include the exercise of discretion and independent judgment in significant matters for the business.

Professional Exemption:

  • The employee must be paid on a salary basis, at a rate not less than $913 per week ($47,476 per year);
  • The employee’s primary work duty must be performing work which requires advance knowledge, which is considered work that is predominantly intellectual in nature and requires a consistent exercise of discretion and judgment;
  • The advance knowledge must be in a field of science or learning; and
  • The advance knowledge must customarily be acquired through a prolonged course of specialized education or intellectual instruction.

Computer Professionals:

  • The DOL’s comments to the new regulations explain that hourly computer employees who earn at least $27.63 per hour and perform certain duties are not impacted by the salary requirements in the new regulations.
  • However, salaried computer workers are exempt under the FLSA only if they satisfy the above listed requirements for Executive, Administrative or Professional employees – including the above salary requirements.   See 81 Fed. Reg. 99, 32457, n. 115 (May 23, 2016).

Outside Sales:

  • Door-to-door or outside sales employees are not impacted by the new salary regulations, as long as the employees properly qualify for this exemption under the other DOL requirements. See 81 Fed. Reg. 99, 32514.4

The Use of Nondiscretionary Bonuses and Incentive Payments:

  • The new regulations specifically allow nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of this new salary requirement. However, in order for these bonuses and incentive payments to count towards a portion of the DOL established salary level, the payments must be paid on a quarterly or more frequent basis.5
  • These bonuses need to be set on objective standards. Examples given by the DOL include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed commission formula.
  • Discretionary bonuses which are given based on the employer’s sole discretion cannot be used to satisfy the new FLSA salary requirements.

​Scheduled Increases to the New Salary Levels:

  • Every three years the minimum salary requirements will increase. The first increase will take place on January 1, 2020, with the next automatic update taking place on January 1, 2023.

Payments on a Fee Basis:

  • The DOL has determined that employees who would otherwise qualify for the above-listed exceptions may also be paid on a fee basis in lieu of a salary. This would occur for example when an employee has a contract to perform a particular task in exchange for a specified fee.
  • To determine whether the fee satisfies the new FLSA salary requirements, the DOL will look at the amount of time (i.e., number of hours) the employee spent working on the job and determine whether or not the employee was paid at least $913 per week based on the fee provided for in the contract. See 81 Fed. Reg. 99, 32551, amended 29 C.F.R. § 541.605.

The DOL has instructed that employers will have a range of options when responding to the new salary requirements. Employers may:

  • Increase employee salaries for employees who clearly meet the above-listed duties tests and are likely to work overtime hours;
  • Retain current salary levels and pay overtime wages, which equal one and a half times the employee's regular rate of pay for any overtime hours worked;
  • Retain current salary levels and reduce or eliminate the amount of hours employees currently work;
  • Reduce or change employee salaries and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
  • Utilize some combination of the above.

In the event your company believes that it will now have several employees who are entitled to overtime wages under the new regulations, it will be important to track the time each of those employees work. The DOL does not require employers to use time clocks to record employee time. However, employers are specifically mandated to keep time records for  each non-exempt worker. Those time records must accurately record the number of daily hours worked by non-exempt employees. This process may prove challenging for employees who have historically been paid on a salary basis, especially for busy or hard-working employees who tend to work beyond their scheduled hours or during lunch breaks.

TSheets, the employee time tracking app, and Lexology, the legal research platform, have launched a new FLSA lawsuit research tool. The tool enables business owners to gain new insight into steeply rising wage and hours lawsuits brought under the Fair Labor Standards Act. Click here to mine the data.