FLSA & Proposed Overtime Rule Guide

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:

salary-level test

1. Salary-level test

Currently, employers must pay employees a salary of at least $455 per week to qualify for the executive, administrative, and professional employee exemptions.

salary-basis test

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.

duties test

3. Duties test

The employee’s primary duties must meet certain criteria.

There is also a special exemption for "highly-compensated employees" who are paid total annual compensation of at least $100,000 and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.

Proposed Rule:

New salary requirements proposed:

On March 7, 2019, the Department of Labor released a proposed rule that would increase the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions from $455 per week to $679 per week ($35,308 annually).

Under the proposed rule, employers would be permitted to 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 annually.

The proposal would permit employers to make a final "catch-up" payment within one pay period after the end of year to bring an employee's compensation up to the required level. Thus, under the proposal, each pay period an employer must pay the exempt executive, administrative, or professional employee 90 percent of the salary level ($611.10 per week), and if at the end of year, the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal at least $35,308, the employer would have one pay period to make up for the shortfall.

Highly compensated employees:

The proposal would increase the total annual compensation requirement for the "highly compensated employees" exemption to $147,414 per year (at least $679 must be paid on a weekly salary basis).

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, but there is no cap. This wouldn't change under the proposal. Thus, as long as the employer pays the employee at least $679 on a weekly salary basis, the employer would be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($147,414 per year).

Timeline:

The changes wouldn't take effect until after the DOL publishes a final rule. Before a final rule can be published, the proposal is subject to a 60-day public comment period, which will end on May 21, 2019. After the 60-day public comment period ends, the DOL will review the comments to determine whether changes should be made before publishing a final rule. The process could take several months.

Steps to Consider Now:

#1: Ensure that your "exempt" employees are properly classified under existing rules.

Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.

#2: Evaluate potential costs.

Evaluate the potential impact on your business by comparing 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 proposed 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 proposed minimum or they frequently work overtime, you may want to consider raising their salary to maintain the exemption.

These options are covered in further detail below:

If you have exempt employees who are paid less than the new proposed minimum, you can raise their salaries to meet the new requirement. If you elect this option, it is a best practice to review their job duties to ensure they continue to qualify for an exemption. Additionally, make sure exempt employees' job descriptions accurately reflect current responsibilities.

Note: If you provide your exempt employees with nondiscretionary bonuses, incentive payments or commissions, factor this in when calculating the potential costs of raising their salaries to meet the new requirement. Under the proposal, employers must pay at least 90 percent of the minimum (or $611.10) in the form of salary each week and then would be allowed to apply nondiscretionary bonuses, incentive payments, and commissions toward up to 10 percent of the minimum (or $67.90), provided these types of compensation are paid at least annually. For example, an employer could satisfy the minimum salary requirement by paying an employee a weekly salary of $611.10 and then a year-end productivity bonus of $3,530.80 ($67.90 x 52 weeks).

If exempt employees don't meet the new salary requirement, you can reclassify them as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek. If these employees rarely work more than 40 hours per week, simply convert their salary to an hourly wage (divide their weekly salary by 40 hours). However, if these 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 when you reclassify them as non-exempt. See an example.

Note: Employers have the option of paying non-exempt employees on a salary basis as long as the employee is paid at least the minimum wage for all hours worked and overtime when he or she works over 40 hours in a workweek. If you pay non-exempt employees on a salary basis, you must ensure that all time worked is accounted for and that the employee is paid overtime when due. Learn more.

#3: Keep an eye on state rules.

Some states have their own salary requirements that already exceed the federal proposal. Some other states may decide to increase their salary thresholds based on the new federal proposal. Review both federal and state law to determine whether an employee may be classified as exempt from overtime. If an employee is covered by both the federal and state law but doesn't meet both sets of tests, consult with counsel to determine how you should classify the employee in that particular situation.

#4: Watch for updates.

We will be monitoring the status of the proposed rule closely and updating this page as developments unfold.