On May 18, 2016, the U.S. Department of Labor ("DOL") issued new regulations modifying the weekly salary and annual compensation threshold levels for white collar exemptions to FLSA overtime requirements. These regulations become effective December 1, 2016. It is critical for employers to become familiar with these new regulations, among other reasons because misclassification of employees as being exempt from FLSA overtime requirements is a costly mistake.
Overview Of The FLSA Salary Basis Test And Highly Compensated Employee Rules
Certain employees can be exempt from the FLSA's overtime requirements. The most common overtime exemptions under the FLSA are the so-called "white collar" overtime exemptions (executive, administrative, professional). To qualify for an executive, administrative or professional exemption, an employee must receive a minimum salary and be paid on a salary basis ("salary basis test") and perform the appropriate duties ("duties test"). The last adjustment to the salary basis test placing it at its current weekly salary of $455/week ($23,660/ annually) was in 2004. At that time, the FLSA regulations were also amended to add in a new "highly compensated" employees overtime exemption for employees that make at least $100,000 annually, have a primary duty performing office or non-manual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
What Are The New Key Provisions?
The newly published FLSA regulations that become effective December 1, 2016, make the following changes:
- The weekly salary threshold level is more than doubled from $455 per week ($23,660 annually) to $913 per week ($47,476 annually);
- The total compensation needed to exempt highly compensated employees is increased from $100,000 annually to $134,004 annually;
- There is now a mechanism that automatically updates these salary and compensation levels every three years, beginning January 1, 2020; and
- Employers are now able to use nondiscretionary bonuses and incentive payments made on a quarterly or more frequent basis to satisfy up to 10 percent of the new standard salary level. (U.S. Department of Labor, Wage and Hour Division, Fact Sheet)
However, the new FLSA regulations do not make any changes to the FLSA duties tests, which in general also must be satisfied for an employee to qualify for the FLSA overtime exemptions.
Below is a comparison of the current and new FLSA Salary Basis Test:
2004 FLSA regulation
NEW 2016 FLSA regulation
Minimum Weekly Salary
At least $455 per week (or $23,660 annually)
At least $913 per week (or $47,476 annually)
Minimum Annual Compensation for Highly Compensated Employees
At least $100,000 annually
At least $134,004 annually
Automatic updating mechanism
Salary and compensation levels will be automatically updated every three years, beginning on January 1, 2020.
Inclusion of Nondiscretionary bonuses and incentive payments
Permits nondiscretionary bonuses and incentive payments (including commissions) to count toward the total annual compensation requirement.
To go towards the standard salary level test, payments of nondiscretionary bonuses and incentive payments must be paid on a quarterly or more frequent basis; the amount is capped at 10 percent of the required salary level amount; and the employer may make a "catch-up" payment.
Next Steps For Public Employers To Prepare For The New Regulations
Given that the new salary basis test threshold of $913 per week and highly compensated employee threshold of $134,004 annually will go into effect on December 1, 2016, public employers should audit all exempt job positions to determine which job positions are affected by these new salary basis test regulations. For those exempt job positions that are below or close to being below these new salary levels, employers should evaluate one of the two following options:
- Increase the salary for the exempt job position to meet or exceed the new salary levels to maintain the overtime exemption; or
- Convert the affected exempt job position to nonexempt status that would qualify for overtime.
If an impacted job position is to remain exempt, the employer should look to increase the salary levels to a level at or higher than the new salary levels that will go into effect on December 1, 2016. Keep in mind that the effective date for these new salary levels – December 1, 2016 – is a Thursday. Therefore, to the extent that the relevant 7-day FLSA workweek for an affected exempt employee begins prior to that (e.g., Sunday), the employer should look to implement the increased salary level at the beginning of that workweek.
If an impacted job position will be converted to nonexempt status, the employer should carefully examine the impacts of this decision and look to take the following steps:
- Provide advance notice to the affected employee about the reclassification;
- Provide training on timekeeping and overtime policies and procedures to the affected employee and their supervisors to ensure compliance with any new overtime obligations; and
- Implement any necessary changes to the payroll system regarding the new nonexempt classification and determine what additional compensation received by the employee needs to be incorporated into the FLSA regular rate of pay for overtime calculations.
A new nonexempt employee must accurately report work hours and comply with the agency's overtime policies and procedures. This is critical because the FLSA imposes an affirmative obligation on employers to keep accurate time records, and requires prompt payment of wages, including overtime. Late payment of overtime and improper calculations of overtime pay are also common and costly mistakes for employers. Without accurate time and payroll records, the employer may face liability for liquidated damages (twice the amount of compensation due) in the event that an FLSA lawsuit is filed alleging overtime claims or liability for back wages.
To the extent that affected exempt job positions involve represented employees, any such actions taken to change wages, hours, and working conditions may also trigger an agency's obligation to meet and confer with the pertinent employee organization over the decision or effects and impacts of such decision. Employers are urged to consult with their labor relations professionals or legal counsel regarding the impact of any meet and confer obligations.
Even where a public employer does not have any exempt employees affected by these new salary basis test regulations, it may also be prudent to assess whether current exempt positions perform the appropriate duties to satisfy the executive, administrative, or professional exemptions. For example, an agency can assess whether an "Analyst" position performs work directly related to the operations of the department and actually exercises discretion and independent judgment with respect to matters of significance in order to meet the duties test for the administrative exemption. (29 C.F.R. sec. 541.200(a)(2-3).) An audit of exempt positions is also beneficial because an employer may be liable for unpaid compensation and liquidated damages going back up to three years for a willful violation of the FLSA in misclassifying an employee as overtime exempt. (29 U.S.C. sec. 255.)
LCW's wage and hour attorneys routinely conduct FLSA audits and provide wage and hour advice and counsel to our public agency clients and are available to advise agencies on the impact of these new FLSA salary basis test regulations. If you have any questions about this issue, please contact our Los Angeles, San Francisco, Fresno, San Diego, or Sacramento office.