United States: Q&A On The FLSA's Changes To Overtime Exemptions

Last month, we discussed the U.S. Department of Labor's (DOL) recently published final rule making changes to the so-called "white collar" overtime exemptions under the Fair Labor Standards Act (FLSA). We also presented a webinar on June 2, 2016, discussing the recent changes to the exemptions and how they may affect employers. As a quick recap, the final rule:

  • Increases the minimum annual salary for exempt employees from $23,660 to $47,476 (or from $455/week to $913/week)
  • Increases the minimum annual salary for exempt highly compensated employees from $100,000 to $134,004
  • Automatically increases these thresholds every three years

Following our recent post and webinar, we have received several sets of common questions regarding the new rules, and for the benefit of all, we answer those questions below.

If the final rule about the overtime changes has already been published, does that mean the changes have already gone into effect?

No. Although the final rule was published last month, the changes will not go into effect until December 1, 2016. The only way this could change is if Congress acts to overturn the new rule (a law has been introduced, but is not likely to pass or survive a veto by the president) or there is a successful legal challenge (again, something that is fairly unlikely). It is, therefore, a good idea for employers to review their wage practices now in order to ensure that, come December 1, 2016, all employees properly classified as exempt (meaning they meet the duties test for the applicable exemption) are paid in compliance with the new rules.

The test for exempt employees is based on their duties and salaries; did the final rule change both?

No. The final rule did not make any changes to the duties tests for any exemption.

If an employer has several employees with the same job title, but some receive less than the new salary standard and some receive more, how should the employer classify these employees?

If each of the employees' duties satisfy the applicable exemption requirements, it is not necessary for employers to reclassify those exempt employees who are already receiving more than the new minimum salary. For those employees whose duties satisfy the exemption requirement, but are receiving less than the new minimum salary, employers will either have to increase their salary to meet the new minimum or reclassify them as non-exempt. However, employers should tread lightly when reclassifying employees solely to avoid the salary increase — although the employer may be saving money with the higher salary payments, it will also have to keep track of the employees' time cards, meal and rest periods, overtime hours, etc., and it may encourage litigious employees to seek counsel in order to determine if these now non-exempt employees should have been classified as such before. These new rules are a good opportunity for employers to review the duties of their exempt employees to ensure that, going forward, employees receive the correct classification.

Additionally, there is no requirement that everyone who has the same job title and is performing similar duties be classified as exempt for the exemption to apply. If the duties performed are exempt, but the salary paid to some is not sufficient to meet the exemption, then those who receive the lower salary will not be exempt — and those that receive a salary that does meet the new rule will be exempt. Here too, however, caution is required, as the difference in payment to employees with the same job title and performing the same duties may give rise to a claim of discrimination under various federal laws. Generally speaking, employees with the same job title who perform the same duties and responsibilities should be paid similarly.

If an employee satisfies the duties test for the exemption, but is making less than the new minimum salary, can they still be considered exempt?

No. Employees must satisfy both the duties requirement and the minimum salary requirement in order to receive the exempt classification. Conversely, this means that if employees satisfy the new salary requirements, but do not satisfy the duties test (i.e., are supervising only one employee when the test states they must supervise at least two), then they may not be classified as exempt.

Are non-profits exempt from these new rules?

It depends, but probably not. The DOL has released special guidance for non-profit organizations. If the non-profit is performing activities for business purposes and receiving over $500,000 in annual sales, then it must comply with the FLSA's minimum wage and overtime requirements. However, income from charitable activities, such as donations, is not considered towards the $500,000 requirement.

What about small businesses — are they excused from following the final rule?

It depends, but probably not. If a business has sales of at least $500,000 per year, it is subject to the FLSA and the new overtime rules. Additionally, certain types of business are automatically covered by the FLSA (hospitals; residential care facilities for older adults or persons with disabilities; schools for children with disabilities or who are gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher learning) so those employers must follow the new rules regardless of revenue.

Alternatively, even if an employer is not covered by the FLSA, most of its employees probably are. The FLSA applies individual coverage to employees who regularly engage in interstate commerce or in the production of goods for interstate commerce. Generally speaking, this means the employee's work involves or relates to moving persons or things across states lines. Such activities could include making out-of-state phone calls; receiving or sending interstate mail or communications (including email); ordering or receiving goods from an out-of-state supplier; handling credit transactions or performing bookkeeping for such activities; and the like. As you can imagine, individual coverage can be expansive.

So again, while the answer to the question is "it depends," the most functional and realistic answer to the question "is a small business excluded from following the new rules with respect to any particular employee?" is "it is possible, but it is not likely."

Can employers pro-rate or annualize the pay for part-time employees to satisfy the annual salary standard?

No. The DOL has issued guidance on this issue as well. Employers are not permitted to pro-rate a part-time employee's salary in order to avoid compliance with the new rules.

What is the penalty for failing to comply with the new exemption requirements?

Employers who — after December 1, 2016 — have exempt employees that do not meet the new minimum standards will open themselves up to potential investigation by the DOL, as well as private litigation, including class action litigation. Given the wage and hour climate prevailing in the country these days, it is definitely not advisable for any employer to take that risk.

If an employer reclassifies exempt employees as non-exempt in order to comply with the new salary requirements, can the employer be liable for past unpaid overtime?

If an employer properly classified its employees as exempt in accordance with the old rules, and now seeks to reclassify them as non-exempt solely to avoid the increase in salary, then it is unlikely that the employer would be liable for unpaid overtime. However, as mentioned above, employers should take care and think strategically when reclassifying employees, absent careful communication with employees, as they may take reclassification as a signal to themselves (and/or their counsel) that they should have been previously classified as non-exempt.

As with any new rule, it is important for employers to evaluate their wage practices and policies, and contact their employment counsel for assistance complying with the DOL's final rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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