Q: What is the Fair Labor Standards Act (FLSA)?
A: The Fair Labor Standards Act (FLSA), also considered the federal Wage and Hour Law, regulates minimum wage, overtime, equal pay, recordkeeping, and child labor. Under the FLSA, employees are classified as either exempt or non-exempt from minimum wage and overtime. Note: Some states and local jurisdictions have their own wage and hour laws, which may provide greater protection for employees than what is provided under the FLSA. Where federal, state, and local laws conflict, the law that is most beneficial to the employee prevails.
Q: Who does the FLSA apply to?
A: The FLSA applies to virtually all employers, including:
- Employers with employees engaged in interstate commerce (defined broadly, such as assembling products that are sent out of state or regularly making phone calls to another state);
- Enterprises (including non-profits) with gross sales or business of $500,000 or more per year;
- Hospitals; enterprises engaged in the care of the sick, the aged, or the mentally ill who reside on the premises; a school for mentally or physically disabled or gifted children; a preschool, an elementary or secondary school, or an institution of higher education (whether operated for profit or not for profit); and
- Public agencies.
Q: What is the difference between an exempt and non-exempt employee?
A: Under the federal FLSA, a non-exempt employee is one who is entitled to at least the minimum wage for each hour worked and overtime whenever he or she works more than 40 hours in a workweek. Any employee may be classified as non-exempt. By contrast, an exempt employee isn't entitled to the minimum wage or overtime, but the employee must satisfy certain tests to be classified as exempt.
Q: For non-exempt employees, what is the overtime rate?
A: Under federal law, the overtime rate is 1.5 times the employee's regular rate of pay. An employee's "regular rate of pay" includes their hourly rate plus the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. However, there are certain types of compensation that are excluded from the regular rate of pay.
Note: Depending on the circumstances, some states have different overtime rates. For instance, California requires two times an employee's regular rate of pay for all hours worked over 12 in a workday.
Q: Can I just pay overtime to non-exempt employees at a flat sum instead of calculating it each week? For example, I know that if I pay my employees a flat sum of $500 each week for overtime, this will cover any and all overtime they work in a workweek.
A: No. You must calculate and pay overtime to non-exempt employees on a per-hour basis. You may not pay employees a flat sum for all overtime worked, even if it would be greater than what is owed on a per-hour basis.
Q: If I pay an employee a salary, does that mean he or she is an exempt employee?
A: Not necessarily. To be classified as exempt, employees must generally satisfy all of the following tests:
- The employee must be paid on a salary basis;
- The salary must meet or exceed the minimum requirements for exemption;
- The employee must receive their full salary in any workweek in which they perform work; and
- The employee must perform specific job duties. Each type of exemption has its own set of primary duties that an employee must perform in order to qualify for the exemption.
Q: What does it mean to pay an employee on a “salary basis”?
A: Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent basis. This predetermined amount cannot be reduced because of variations in the quality of quantity of work.
Q: What is changing in the new rule?
A: The minimum salary requirement for the administrative, professional, executive, and highly compensated employee exemptions is increasing substantially.
|Administrative, Professional, Executive Exemptions
||December 1, 2016
The minimum total compensation for the highly compensated employee exemption will increase from $100,000 per year to $134,004 per year on December 1, 2016 (at least $913 must be paid on a weekly salary basis). There will also be automatic adjustments to the minimum salary requirements every three years.
Q: What about salary requirements for the outside sales and computer professional exemptions from overtime?
A: The outside sales employee exemption has no salary requirement so it isn’t affected by the final rule. Exempt computer professional employees may be paid a salary or an hourly wage. If you pay an exempt computer professional employee a salary, it must be at least $913 per week beginning December 1, 2016. If you pay the employee on an hourly basis, it must be at least $27.63 per hour, which doesn't change under the new rule.
Q: How did the DOL come up with these numbers for the salary test?
A: Using figures from the Census Bureau and Bureau of Labor Statistics, the DOL set the minimum salary requirement for the administrative, professional, and executive exemptions at the 40th percentile of full-time salaried workers in the lowest-wage region in the United States (currently the South). For the highly compensated employee exemption, the DOL set the minimum salary requirement at the 90th percentile of full-time salaried workers nationally.
Q: Does the rule change the duties tests?
A: No, the DOL didn't make any changes to the duties tests.
Q: I am a small employer. Am I covered by the final rule?
A: Virtually all employers are covered by the FLSA and therefore any subsequent changes to the FLSA.
Q: What is the deadline for me to comply with the final rule?
A: December 1, 2016. See the Options to Consider section below for information on how to comply.
Q: How will the automatic adjustments to the minimum salary requirements work?
A: Every three years, using Census Bureau and Bureau of Labor Statistics' figures, the DOL will adjust the minimum salary requirement for the administrative, professional, and executive exemptions to keep it at the 40th percentile of full-time salaried workers in the lowest-wage region (currently the South), and the total annual compensation required for the highly compensated employee exemption at the 90th percentile of full-time salaried workers nationally. The first adjustment is scheduled for January 1, 2020.
Q: How will I find out about these adjustments?
A: The DOL will publish a notice of updated salary requirements in the Federal Register at least 150 days before those changes take effect, and will also publish the updated rates on the Wage and Hour Division’s website.
Q: My state has its own rules for exemption from overtime. Will those change?
A: Some states, such as California, may raise their minimum salary requirements for exemption as a result of the new federal rule. However, states aren't required to make any changes. Generally, where federal, state, and local laws conflict, the law that is most beneficial to the employee prevails.
Q: We have employees in California, which has its own overtime rules and exemption tests. What do the new federal rules mean for us?
A: By way of background, California requires overtime in more situations than the FLSA. In California, non-exempt employees must receive 1.5 times their regular rate of pay for:
- Hours worked in excess of eight in one workday,
- More than 40 hours in one workweek (same as FLSA), and
- For the first eight hours of work performed on the seventh consecutive work day in a single workweek
California employees are also entitled to double their regular rate of pay for all hours worked in excess of:
- 12 hours in any workday, and
- Eight on the seventh consecutive work day in a workweek.
California has exemptions from these requirements for bona fide administrative, professional, and executive employees, provided they meet certain salary and duties tests. The state's minimum salary requirement for these exemptions is two times the state minimum wage. Until January 1, 2017, the state's minimum salary requirement is $800 per week (based on a state minimum wage of $10 per hour). For employers with 26 or more employees, the minimum salary requirement will increase to $840 per week on January 1, 2017 (smaller employers won't see this increase until the following year) as a result of an increase to the minimum wage.
Therefore, until December 1, 2016, California's minimum salary requirement for exemption from overtime will exceed the FLSA's requirement. Once the new federal rule takes effect on December 1, 2016, however, the federal minimum salary requirement will be higher than California's salary requirement. After December 1, if an exempt employee in California earns equal to or more than the state minimum salary but less than the federal minimum salary, he or she will be entitled to overtime under the FLSA for work performed in excess of 40 hours in a workweek. However, they would not be entitled to overtime for hours worked in excess of 8 or 12 in one work day or for work performed on the seventh consecutive work day in a workweek since that employee would meet California state exemption requirements.
Employers also have the option of raising the employee's salary to satisfy both federal and state requirements (at least $913 per week) and the employee would be exempt from overtime under both sets of rules (provided the employee satisfies all applicable duties tests).
California employers should also note that unlike the new federal rules, California doesn't permit the use of bonuses to satisfy up to 10 percent of the salary requirement. Therefore, to maintain the state exemption, California employers must satisfy the state's requirement with a salary alone.
Q: Can I count bonuses toward meeting the minimum salary requirement?
A: Beginning December 1, 2016, employers may use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. To satisfy the rule, employers may make one final catch-up payment no later than the next pay period after at the end of the quarter if the bonus, incentive payment, or commission ended up being less than anticipated and the employee’s weekly salary plus nondiscretionary bonuses, incentives and commissions does not equal or exceed 13 times the minimum weekly salary of $913.
Note: For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement. This doesn’t change under the final rule. Thus, as long as the employer pays the employee at least $913 on a weekly salary basis, the employer can count these other forms of compensation toward meeting the minimum total compensation requirement ($134,004 per year).
Q: What are nondiscretionary bonuses?
A: Nondiscretionary bonuses are generally defined as those announced or promised in advance. For example, if you announce at the beginning of the year that employees will be entitled to a bonus for meeting certain production goals, this would be considered a nondiscretionary bonus. By contrast, discretionary bonuses aren’t announced or promised in advance. For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus. Discretionary bonuses may not be counted toward meeting the minimum salary requirement.
Q: Can you give me an example of counting a quarterly bonus toward the minimum salary requirement?
A: Let's say an employee meets the duties test for the administrative exemption and is paid a weekly salary of $825.00 and a quarterly production bonus of $2,000. As a result, her total salary for the quarter is:
$825 x 13 weeks = $10,725
$10,725 + $2,000 = $12,725
The employee has exceeded the total salary level requirement of $11,869 during the quarter ($913.00 x 13 weeks) of which at least $10,682.10 ($821.70 per week x 13 weeks) must be paid on a salary basis.
Q: What happens if the employee doesn't meet goals and doesn't earn the full quarterly bonus that would have enabled him to receive at least $913 per week?
A: You would have to make a catch-up payment. Employers may make a catch-up payment no later than the next pay period after the end of the quarter where the bonus or commission was less than anticipated and the employee's salary plus bonuses and commissions for the quarter does not equal or exceed 13 times the minimum weekly salary of $913.
Here's an example.
An employee meets the duties test for the professional exemption and is paid a weekly salary of $821.70 (90 percent of the minimum requirement) plus a nondiscretionary bonus each quarter. At the end of the quarter, the employee's nondiscretionary bonus amounts to $750. The employee's total quarterly salary is:
$821.70 (salary) x 13 weeks = $10,682.10
$10,682.10 (salary paid) + $750 (bonus earned) = $11,432.10 (salary plus nondiscretionary bonus paid)
Because the total salary and bonus does not equal the standard salary level for 13 weeks, the employer must generally make an additional payment of at least $436.90 for the employee to maintain the exemption.
$11,432.10 + $436.90 = 11,869.00
If an employer does not make the catch up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter in which the employee did not receive at least the minimum salary requirement. For example, if the employee worked 45 hours during a week in which the nondiscretionary bonus plus salary did not meet the combined salary threshold, the employer would owe the employee overtime pay for those five hours.
For more information, see our Tip of the Week on How Bonuses Can Help You Meet the New Salary Requirement.
Options to Consider
Q: What must I do to comply with the new rules?
A: If your exempt employees' salaries fall below the new minimum, you will generally either have to:
- Raise their salaries to the new requirement (if you elect this option, review their job duties to ensure they continue to qualify for the applicable exemption); or
- Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.
Q: Would both of these options increase my compensation costs?
A: It depends on which option you choose and how many hours your exempt employees typically work per week.
If you raise employees' salaries to meet the new requirement, your compensation costs will increase.
40 hours per week schedule:
If the potentially impacted employees rarely work more than 40 hours in a week and you don't want to increase your compensation costs, you could reclassify these employees as non-exempt and convert their salary to an hourly wage (divide their weekly salary by 40 hours). These employees would be entitled to overtime if they work more than 40 hours in a workweek.
40+ hour per week schedule:
If the potentially impacted employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium.
Example of Cost-Neutral Option: An exempt employee's current salary is $715 per week, the employee regularly works 50 hours per week, and you want to reclassify this employee as a non-exempt employee but keep your costs the same. You would calculate the cost-neutral hourly wage as follows:
$715 weekly salary
[40 hours + (10 overtime hours x 1.5)]
= $13 hourly rate
This employee would be paid $13 per hour for the first 40 hours and $19.50 per hour ($13 x 1.5) for each hour of overtime.
Click here for more information on these options, or use our calculator to help you estimate the costs of each of these options for your business.
Q: What happens if our company's workweek doesn't start on December 1, 2016? When do I raise employees' salaries or reclassify them a non-exempt?
A: The new rules take effect on December 1, 2016, which is a Thursday. Many employers don't have workweeks that will begin on a Thursday. In such cases, the best practice would be to implement salary increases at the beginning of the workweek so that exempt employees are paid at least $913 for the workweek that includes time worked on or after December 1, 2016. For employees who will be reclassified as non-exempt, the best practice would also be to implement the change at the beginning of the workweek that includes time worked on or after December 1, 2016. For example, if your workweek begins Sunday, November 27, you would increase your employee's salary or reclassify your employee as non-exempt on that date.
Q: How do I change an employee from salary to hourly, or vice versa, in RUN Powered by ADP® (RUN)?
A: To change an employee's pay in RUN, complete these steps:
- Navigate to Employees > Directory. Click the Employee name.
- From the left menu, select Payroll Info.
- Change the Pay Type in the drop down menu. Click Save.
Q: If I decide to change employees’ pay, how much notice must I give?
A: Check your state and local laws, some of which may have specific notice requirements for pay changes. For example, Missouri generally requires 30 days’ notice to employees before reductions in pay. In the absence of a specific requirement, the best practice is to give as much notice as possible.
Q: If our company decides to use the cost-neutral option when reclassifying employees from exempt to non-exempt, do we have to use that method for all employees we decide to reclassify?
A: If you decide to reclassify employees to non-exempt to comply with the final rule, you generally can choose one option for some employees and another for other employees. Remember, when reclassifying employees as non-exempt, the employee must receive at least the minimum wage for each hour worked and overtime pay whenever they work more than 40 hours in a workweek.
Q: Can one employee be exempt and another non-exempt even if they have the same job title?
A: Because job title is not used to determine exemption status, the FLSA generally doesn’t prevent an employer from classifying one employee as exempt and another employee as non-exempt even though they have the same job titles. However, the employee classified as exempt must meet all the applicable tests for exemption. Additionally, there are other factors to consider, such as internal equity and employee morale. Internal equity means employees are paid fairly when compared with other employees within your company. If two employees have the same job title and there are substantial differences in pay (because one employee is receiving overtime pay), employees may have questions about why they are paid less.
Q: What about paying overtime using the fluctuating workweek method?
A: To use the fluctuating workweek method under the FLSA:
- The employee’s hours must fluctuate from week to week (both above 40 hours and below 40 hours);
- The employee must receive a fixed salary for whatever hours he or she is called upon to work in a workweek, regardless of how few or many;
- The employee and employer must have a clear mutual understanding (which should be in writing) that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek;
- The salary must be sufficient enough to provide compensation to the employee at a rate no less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours worked is greatest; and
- The employee must receive extra pay for overtime hours worked at a rate no less than one-half times his or her regular rate of pay. Since the salary is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the regular rate of the employee will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week.
While the fluctuating workweek method can seem like an attractive option for reducing overtime costs when compared with the standard overtime calculation, there are some caveats to consider. First, some states, including California, expressly prohibit employers from using the fluctuating workweek method for paying overtime. Additionally, this method is also a common source of employee lawsuits. Employers should check their state (and local) law and consult legal counsel as necessary before using it.
Q: Many of my exempt employees haven’t clocked in and out for years and now I plan to reclassify them as non-exempt and need accurate timekeeping. What can I do to help with the transition?
A: Here are several best practices for non-exempt employees:
- Provide training on your timekeeping policies and on using your timekeeping system.
- Direct them to record all of the time they work and expressly prohibit off-the clock work (however, if they do perform off-the clock work, you must pay them for hours worked).
- Inform them that they should report any missed punches immediately.
- Require them to punch out for unpaid meal periods.
- At the end of each payroll period, require them to confirm their hours of work.
- Consider controls to prevent off-the-clock work (e.g., limiting remote access to work email).
- Closely monitor compliance with your timekeeping rules and practices.
Remember, non-exempt employees must be paid not only for productive time (time actually spent working) but also certain nonproductive time, such as rest breaks, travel time and training time.
Q: To keep my overtime costs down, can I adopt a policy that prohibits employees from working overtime unless approved by their supervisor in advance?
A: Yes, you may adopt such a policy, but remember that even if employees violate the policy, you will still have to pay them overtime if they work more than 40 hours in a workweek. While you may subject them to discipline for violating your policy, you may never withhold overtime pay.
Q: Can I continue to pay impacted employees a salary after I reclassify them as non-exempt?
A: If you reclassify employees as non-exempt, you can still pay them a salary as long as they receive at least the minimum wage for each hour worked and overtime pay whenever they work more than 40 hours in a workweek. Remember, you will need to track their hours closely to ensure you pay overtime in accordance with the law.
Q: When reclassifying an employee as non-exempt, can I transfer some of the employee’s duties to a part-time employee to limit the reclassified employee’s hours to 40 per week?
A: Transferring duties of a non-exempt employee to another employee continues to be one of the options employers have for reducing overtime costs.