On May 18, 2016, the Department of Labor announced the publication of its final rule updating the overtime regulations (“Overtime Rule”) under the Fair Labor Standards Act (FLSA). The FLSA applies to “Covered Enterprises” as well as individuals. Covered Enterprises include businesses with annual sales or business of at least $500,000. However, hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies are “named enterprises,” meaning they are covered by the FLSA regardless of their total annual sales or business done. Under individual coverage, employees may be entitled to FLSA protection if they themselves are engaged in interstate commerce or in the production of goods for interstate commerce.
The Overtime Rule, both current and revised, applies to an employee of a CE unless the employee is “exempt.” The FLSA’s exemptions include ”bona fide” Executive, Administrative, and Professional employees as well as certain computer professionals and outside sales employees. The DOL’s revised rule will increase the number of employees that are not exempt from the Overtime Rule. The newly revised rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the revised rule:
1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
The fact that an employee is paid on a salary basis is not alone sufficient to exempt that employee from the FLSA’s Overtime Rule. For the exemption to apply, an employee’s specific job duties and salary must meet all of the applicable requirements provided in the DOL’s regulations. See https://www.dol.gov/whd/overtime/fs17a_overview.pdf. Accordingly, the duties test must be met even if the employee’s salary exceeds the standard salary level. However, the salary level test does not apply to outside sales employees, teachers, and employees practicing law or medicine. Academic administrative employees may qualify for exemption either by satisfying the standard salary level test or, alternatively, being paid on a salary basis at a rate at least equal to the entrance salary for teachers in the educational establishment at which the employee is employed.
Under the new Overtime Rule, employers may use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level. For employers to credit these payments toward the salary level test, they must be paid on a quarterly or more frequent basis. Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. By contrast, discretionary bonuses are generally paid without prior contract, promise, or announcement and cannot be used to satisfy the salary level requirement. If an employee does not earn enough of a nondiscretionary bonus or incentive payment in a given quarter to retain his or her exempt status, the DOL permits the employer to make a “catch-up” payment no later than the next pay period after the end of the quarter. If such catch-up payment is not made within the time frame allotted, the exemption is lost for the prior quarter and the overtime premium must be paid.
“Highly compensated employees” (HCEs) that receive total annual compensation of at least $134,004 who do not have Executive, Administrative and Professional “duties” can be exempt from the Overtime Rule of the FLSA if they meet a more relaxed duties test than is required for employees paid the standard salary level. HCEs are exempt if they customarily and regularly perform at least one of the duties of an exempt Executive, Administrative, or Professional employee. Nondiscretionary bonuses and incentive payments may also be counted toward the $134,004 total annual compensation requirement, but the employer must pay at least the full standard salary level of $913 per week on a salary or fee basis to qualify for this exemption. If an employee’s total compensation in a given annual period fails to meet the $134,004 threshold, an employer may also make “catch-up” payments by the same method they would make these payments to ordinary employees.
The effective date of the revised rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020. Although the Office of Management and Budget (OMB) has reviewed and approved the revised rule, the document has not yet been published in the Federal Register. However, it appears that the new Overtime Rule can be found at 29 CFR Part 541 once it is published on May 23, 2016. See https://federalregister.gov/a/2016-11754.
Erin Borissov is a partner in the law firm of Parr Richey Frandsen Patterson Kruse, LLP with offices in Indianapolis and Lebanon, Indiana. She advises utilities and business clients in the areas of utility regulatory law, electric cooperative law, easement and right-of-way law, commercial transactions, corporate governance, and corporate compliance.
The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.