FLSA & Final Overtime Rules Guide

On August 31, 2017, the federal judge permanently blocked the Final Rule. The judge concluded that the Department of Labor (DOL) exceeded its authority by raising the minimum salary so significantly that it became the determinative test for exempt status, diminishing the importance of the duties test. The latest ruling means that the minimum exempt salary requirement remains at $455 per week under federal law. The ruling also closes one of the avenues by which the 2016 Final Rule could take effect in the future. However, employers should continue to watch for any further developments in the case. View previous updates

Background:

The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as "exempt" employees. To be considered "exempt," these employees must generally satisfy three tests:

1. Salary-level test

Beginning December 1, 2016 employers must pay employees at least $913 per week to qualify for the executive, administrative, and professional employee exemptions.

2. Salary-basis test

With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.

3. Duties test

The employee’s primary duties must meet certain criteria.

Final Rules:

New Salary Requirements

The DOL has made the following increase to the minimum salary requirement for the administrative, professional, and executive exemptions:

Beginning December 1, 2016, employees who meet the administrative, professional (including the salaried computer professional), and executive exemptions must be paid a minimum weekly salary of $913 in order to be exempt from the FLSA’s minimum wage and overtime requirements.

Highly Compensated Employees

The DOL's final rule also raises the total compensation required for the highly compensated employee exemption (employees who regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee) from $100,000 per year to $134,004, $913 of which must be paid on a weekly salary basis.

Incentives, Bonuses, and Commissions

For the first time, beginning December 1, 2016, employers may use nondiscretionary bonuses (generally defined as those announced or promised in advance), 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.

Automatic Adjustments Every Three Years

Every three years, the DOL will adjust the minimum salary requirement for these exemptions. The first adjustment is scheduled for January 1, 2020. The DOL will publish a notice of updated salary requirements at least 150 days before those changes take effect.

How to Comply:

#1: Ensure that your "exempt" employees are properly classified under the final rule.

Beginning December 1, 2016, employees who receive less than $913 per week are considered "non-exempt" and must be paid at least the minimum wage and overtime. Employees who are paid a salary of at least $913 per week and perform job duties that meet the administrative, executive, or professional exemption, may be classified as "exempt." If an exemption no longer applies (i.e. the employee no longer performs certain job duties, or earns less than $913 per week), the employee should be promptly reclassified as "non-exempt" and paid overtime in accordance with federal and state law.

#2: Compare the costs of raising employees' salaries.

Compare the costs of raising an exempt employee's salary to reclassifying the employee as non-exempt and paying them overtime when they work more than 40 hours in a workweek. If an employee's salary is well below the new minimum and they rarely work overtime, it may be more cost-effective to reclassify them as non-exempt. Conversely, if an employee's salary is closer to the new minimum or they frequently work overtime, you may want to consider raising their salary to maintain the exemption. Remember that with automatic adjustments every three years, you will need to review and adjust exempt employees' salaries at least every three years.

These options are covered in further detail below:

Option 1: Raise Exempt Employees' Salaries

Option 2: Reclassify Employees as Non-Exempt

#3: Properly track all hours worked.

Once the rules take effect, employers' timekeeping practices may face increased scrutiny. Ensure that you have a mechanism in place to track all non-exempt employees' hours. Remember that previously exempt employees may be used to working after hours, so consider training these employees on your timekeeping policies and procedures to prevent after hours work.

ADP® Time & Attendance can help you track employees' hours and meet your state and federal pay requirements.