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 public education 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, 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.
Under the FLSA, full-time faculty, part-time faculty, and teaching assistants are exempt from overtime requirements as teachers because the definition of teaching is quite broad and there is no salary basis test for the teacher exemption. (29 C.F.R. sec. 541.303, Teachers)
The FLSA also contains a separate salary test for academic employees whose primary duties are administrative functions relating to academic instruction or training (as opposed to general business operations of the school). Common examples of those positions at schools are a Dean, a Director of Student Success and Equity, and a Director of Admissions and Records. The FLSA salary requirement is the lower of: $455/week, or the minimum entrance salary for full-time teachers at the school.
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 threshold salary level of $913.
(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:
Click here to view table.
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 education employers should audit all exempt job positions to determine which job positions are affected by these new salary basis test regulations.
As noted above, full-time faculty, part-time faculty, and teaching assistants engaged in a teaching capacity should not be affected by these changes to the FLSA salary basis test, as they are exempt from the salary basis test under the teacher exemption.
For those exempt academic employees whose primary duties are administrative functions relating to academic instruction or training, the new FLSA salary requirement is the lower of:
- $913/week, or
- The minimum entrance salary for full-time teachers at the school.
To determine if these employees may be exempt, a school should first examine its entrance salary for full-time teachers. If that salary is less than $913/week, then the minimum salary for academic employees will be that entrance salary amount. If that salary is greater than $913 per week, then the minimum salary for administrative academic employees will be $913 per week.
Overtime exempt employees other than teachers or those in administrative functions relating to academic instruction or training – such as exempt, classified employees – will be subject to the new salary basis test of $913 per week or the highly compensated employees exemption of $134,004 annually depending on what duties test the employee qualifies for.
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 affected job position is to remain exempt, the employer should increase the salary 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 implement the increased salary level at the beginning of that workweek.
If an affected 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 change in status;
- Provide training on timekeeping and overtime policies and procedures to affected employees 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 employee files an FLSA lawsuit alleging overtime claims or liability for back wages.
To the extent that affected exempt 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 should consult with their legal counsel or labor relations professionals regarding the impact of any meet and confer obligations.
Even when a public education 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, a school or district 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.)