FAQs: Final Overtime Rule
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.
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.
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 they work more than 40 hours in a workweek. Any employee may be classified as non-exempt. By contrast, an exempt employee isn't entitled to minimum wage or overtime, but the employee must satisfy certain tests to be classified as exempt.
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 also requires employers to pay non-exempt employees double their regular rate of pay for all hours worked over 12 in a workday, and over eight on the seventh consecutive workday in a workweek.
Not necessarily. To be classified as exempt, executive, administrative, and professional employee 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 ($455 per week until January 1, 2020);
- 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.
There is also a special exemption for "highly-compensated employees" who are paid total annual compensation of at least $100,000 (until January 1, 2020) and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
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.
2019 Final Rule
Effective January 1, 2020, the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions increased from $455 per week to $684 per week (equivalent to $35,568 per year). Employers are also able to count certain bonuses toward meeting this obligation. For more information, see the Nondiscretionary Pay section below.
The final rule also increased the total annual compensation requirement for the "highly compensated employee" exemption to $107,432 per year (at least $684 would be required to be paid on a weekly salary basis).
The final rule also indicated that the DOL will update these pay requirements more regularly in the future.
The outside sales employee exemption has no salary requirement so it wouldn't be 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, the final rule requires it to be at least $684 per week. 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.
No, the DOL didn't make any changes to the duties tests.
Virtually all employers are covered by the FLSA and therefore any subsequent changes to the FLSA.
Some states 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. 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.
California has exemptions from its overtime 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. For the administrative, professional, and executive exemptions, employers with 26 or more employees must pay a salary of at least $1,200 per week in 2022. Employers with fewer than 26 employees must pay a minimum salary of at least $1,120 to these exempt employees in 2022. Therefore, California's minimum salary requirement for exemption from overtime exceeds the new federal rule. California employers should also note that unlike the new federal rule, California rules don'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.
During the Obama Administration, the DOL published a final rule that would have raised the minimum salary requirement for the administrative, professional, and executive exemptions to $913 per week, but a court blocked that rule from taking effect.
Beginning January 1, 2020, employers are 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.
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 year if the bonus, incentive payment, or commission ended up being less than anticipated. For example, if an employer chooses this option, each pay period, the employer must pay their exempt executive, administrative, or professional employee at least 90 percent of the salary level ($615.60 per week). Then, if at the end of year, the employee's paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) does not equal at least $35,568, the employer would have one pay period to make up for the shortfall.
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 10 percent cap like the other exemptions. This won't change under the new rule. Thus, as long as the employer pays the employee at least $684 on a weekly salary basis, the employer will be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($107,432 per year).
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.
Options to Consider
If your exempt employees' salaries fall below the new minimum, you 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.
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 $550 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:
|$550 weekly salary
[40 hours + (10 overtime hours x 1.5)]
= $10 hourly rate
This employee would be paid $10 per hour for the first 40 hours and $15 per hour ($10 x 1.5) for each hour of overtime. Remember, whatever hourly rate you decide to pay reclassified employees, it must meet or exceed the highest applicable minimum wage (federal, state, or local). If the result above is less than the applicable minimum, you would need to raise the rate of pay to meet the requirement.
Some state and local laws 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.
If you decide to reclassify employees to non-exempt to comply, you generally can choose one option for some employees and another for other employees. Remember, when reclassifying employees as non-exempt, all such employees must receive at least the minimum wage for each hour worked and overtime pay whenever they work more than 40 hours in a workweek.
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 (meaning employees in similar roles and with similar experience are paid comparably) and employee morale. 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.
To use the fluctuating workweek method under the FLSA:
- The employee's hours must fluctuate from week to week;
- The employee must receive a fixed salary for whatever hours they are 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.
Note: 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.
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 work hours.
- Consider controls to prevent off-the-clock work, such as, 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.
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.
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.
Transferring duties of a non-exempt employee to another employee continues to be one of the options employers have for reducing overtime costs.