On Sept. 24, 2019, the Department of Labor (DOL) issued a final rule increasing the salary-level threshold for some “white-collar exemptions” under the Fair Labor Standards Act (FLSA) from $455 per week to $684 per week. The final rule is effective Jan.1, 2020, and is estimated to extend overtime protection to more than 1,000,000 workers who are not currently eligible for overtime pay under the FLSA. This article provides a general overview of the rule change and a more detailed discussion about how the FLSA rules, both old and new, may impact your company.
Overview of the FLSA and the New Rule
The FLSA is a federal statute that governs employees’ entitlement to overtime pay. The general rule is that an employee is entitled to overtime pay for every hour worked over 40 hours in a single work week. The calculation is done on a week-by-week basis, not a bi-weekly pay cycle. If an employee works 60 hours one week and 20 hours the next week, the employee is entitled to 20 hours of overtime, even though the average hours worked is 40 for the two weeks combined. Overtime pay is calculated as 1.5 times an employee’s regular rate of pay.
There are multiple “exemptions” under the FLSA, meaning certain employees do not have to be paid overtime, even if they work more than 40 hours in a week. Some of the exemptions are known as “white-collar exemptions” and include, for example, executive employees. To qualify for most of the “white-collar exemptions,” an employee must be paid on a salaried basis at a certain amount and have certain job duties. The rule change impacts the salary threshold requirement; it does not impact any of the “job duty” requirements.
Employers should be proactive in preparing for this change. Now is a good time to review your company’s policies regarding overtime to ensure your company is complying with the FLSA rules. Below is a more detailed description about how the overtime rules may impact your company and steps your company should consider taking to respond to the new rule.
How the FLSA Rules, Both Old and New, May Impact Your Company
Let’s say your company pays an employee a salary of $20,000 per year and does not worry about overtime because she is a “salaried employee.” Is your company breaking the law? Yes. This employee does not meet the minimum salary requirement for exempt status.
What if you increase the employee’s salary to $25,000? Are you breaking the law? Maybe. Your company will be compliant with the minimum salary requirement until Jan. 1, 2020. However, the employee also must meet the duties test (discussed below) and, beginning Jan. 1, 2020, must receive an increase in salary under the new rule to meet the salary-threshold test.
What if you increase the employee’s salary to $36,000? Are you breaking the law? Maybe. After Jan. 1, 2020, your company will be compliant with the minimum salary requirement, but the employee must still meet the duties test.
As noted above, for an employee to be treated as “exempt,” the employer must be able to show the employee meets two criteria 1) the minimum salary test; and 2) the duties test. Until Jan. 1, 2020, the minimum annual salary requirement is $23,660 per year. After Jan. 1, 2020, an employee must be paid an annual salary of at least $35,568 to be eligible for exempt status. Under the new rule, nondiscretionary bonuses and incentive payments, including commissions, paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the salary requirement.
The new DOL rule also raises the threshold for another exemption — highly compensated employees. The minimum threshold for highly compensated employees will increase from $100,000 per year to $107,432, of which, $684 must be paid weekly on a salary or fee basis.
To be exempt under the FLSA, as well as receive the required minimum salary, an employee must fall into a certain job category which is called the “duties test.” For highly-compensated employees, the duties test is not as rigid.
For the executive, administrative and professional exemptions, employees must perform duties as follow:
- The employee's primary duty must be office or nonmanual work.
- The employee must "customarily and regularly" perform at least one of the bona fide exempt duties of an executive, administrative or professional employee.
Each of these tests — executive, administrative and professional, have detailed criteria that must be met.
To ensure compliance with the new law, employers should review which employees have been categorized as exempt and ensure they are being paid the new minimum salary. If employees are not receiving the minimum salary, their salaries must be increased by Jan. 1, or they will no longer qualify for exempt status. For any employee who will no longer be exempt after Jan. 1, 2020, because the employer elects not to increase his or her salary, it is important that employers train that employee regarding proper record keeping procedures to ensure the employee tracks his or her time, even if he or she is still paid a salary. Strict record keeping policies are crucial to prevent unpaid overtime claims. In addition, this is a good time for employers to examine whether they have properly classified employees as exempt. Do employees who are classified as exempt meet one of the classifications?
The white-collar exemptions each have slightly different duties tests:
- Executive exemption. The employee's primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers (or the employee's suggestions and recommendations as to hiring, firing or changing the status of other employees must be given particular weight).
- Administrative exemption. The employee's primary duty must be office or nonmanual work that is directly related to the management or general business operations of the employer or the employer's customers. The employee's primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.
- Professional exemption. The employee's primary duty must be work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction and study.
There are also exempt categories for outside sales and certain computer professional. These exemptions are different in that they do not have same salary requirements. In fact, the outside sales exemption does not have a salary requirement at all. The computer professional exemption has its own salary requirement. These exemptions are as follows:
- Outside Sales. The employee’s primary duty must be making sales (as defined by the Fair Labor Standards Act), or obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client an customer. The employee must also be customarily and regularly engaged away from the employer’s place or places of business;
- Computer Professional. The employee must be paid at least $684 per week, or if compensated on an hourly basis, not less than $27.63 per hour. The employee must be employed as a computer systems analysis, computer programmer, software engineer or other similarly skilled worker in the computer field. The employee’s primary duty must consist of: (1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (2) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) A combination of the aforementioned duties, the performance of which requires the same level of skills.
If you need assistance to comply with the new law or to audit your claimed exemptions, please send an email to Christina Jepson at cjepson@parsonsbehle.com or call 801-536-6820, or contact Sean Monson by sending an email to smonson@parsonsbehle.com or call 801-536-6714.
