Yesterday, the White House released long-awaited changes to the federal overtime rules. The rules become effective December 1, 2016.
The Fair Labor Standards Act (FLSA) governs federal overtime provisions. It establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for employees in the private sector and in Federal, State, and local governments.
The FLSA applies to most U.S. employers. Specifically, it applies to employers with $500,000 in gross sales and employers who engage in interstate commerce, produce goods for interstate commerce, or sell, handle or work on goods or materials that have been moved in or produced for interstate commerce. It also applies to the following entities, regardless of gross sales: hospitals; businesses providing medical or nursing care for residents; schools (whether operated for profit or not for profit); and public agencies.
All employees of an employer covered by the FLSA must receive overtime pay for any hours worked over 40 in a workweek at a rate not less than time and a half of their regular rate of pay. An employee’s workweek must be fixed and a recurring period of 7 consecutive 24 hour periods. Employees may be “exempt” from the FLSA overtime and minimum wage rules if they meet certain limited requirements. The exemptions are very narrowly defined, and include
- Executive, administrative, and professional employees (including teachers and academic administrative personnel in elementary and secondary schools), outside sales employees, and certain skilled computer professionals (as defined in the Department of Labor's regulations)
- Employees of certain seasonal amusement or recreational establishments
- Employees of certain small newspapers and switchboard operators of small telephone companies
- Seamen employed on foreign vessels
- Employees engaged in fishing operations
- Employees engaged in newspaper delivery
- Farm workers employed on small farms (i.e., those that used less than 500 "man‑days" of farm labor in any calendar quarter of the preceding calendar year)
- Casual babysitters and persons employed as companions to the elderly or infirm
Many employers point to the “white collar” exemption to the FLSA to avoid paying overtime. The FLSA's white collar exemptions exclude "bona fide" executive, administrative, and professional employees. Certain computer professionals and outside sales employees are also included in the exemption and therefore excluded from the overtime requirements.
Paying someone a salary (instead of hourly) is not sufficient to claim the white collar exemption from the FLSA. Instead, each job position must be analyzed independently to make certain the job duties meet the requirements set forth by the Department of Labor. A summary of those requirements can be accessed here. Importantly, the employee’s job duties must involve the exercise of discretion and independent judgment. Certain salary thresholds also apply.
The new guidance released yesterday modifies the use of the “white collar” exemption to the overtime rules by making the following modifications.
- Raises the salary threshold from $23,660 to $47,476 a year ($455 to $913 a week). Bonuses and incentive payments may count toward up to 10 percent of the new salary level. This doubles the current salary threshold and it is scheduled to increase every three years. The new dollar levels are tied to the 40th percentile of full-time salaried workers in the lowest income region of the country. The first update will occur January 1, 2020.
- Raises the “highly compensated employee” threshold – from $100,000 to $134,004. Above this upper limit, there is only a minimal showing needed to demonstrate an employee is not eligible for overtime.
Importantly, no changes were made to the “duties” test for determining if an employee can be considered for an exemption.
All employers will need to analyze the pay structure of their employees and make modifications, if necessary, to comply with the new FLSA overtime and wage provisions. Additional guidance can be accessed here.