Salary Basis for FLSA Exemptions Raised Dramatically

Claiming that your employees are exempt from overtime is about to become much more difficult with release of new regulations this week by the U.S. Department of Labor (“DOL”) under the Fair Labor Standards Act (“FLSA”).

On June 29, 2015, President Obama announced that the DOL is issuing proposed rules that will probably go into effect in early 2016. Those proposed rules redefine which employees have to earn overtime on their hourly pay instead of being paid as an exempt salaried employee.

The result could be skyrocketing overtime costs and more frequent wage and hour suits against companies that fail to make this transition carefully.

The advantage for an employer of an FLSA exemption has always been that the employer doesn’t have to track that employee’s hours and doesn’t have to pay overtime wages of 1.5 times the hourly rate for anything over 40 hours worked in one workweek. That advantage will no longer be available to you as an employer in 2016 for those employees you pay less than $970 per week, which adds up to $50,440 per year.

Many administrative personnel who perform marketing, insurance, human resources, accounting and other “back office” functions in your office may need to be moved to an hourly wage and receive overtime if they work more than 40 hours per week. Ditto for your store managers, assistant managers, and other “executive” personnel. Even “learned professionals” like engineers and accountants who earn less than $50,440 annually will have to be paid an hourly rate and overtime pay in the weeks in which they work more than 40 hours.

The reason that so many people who used to be paid on salary as “exempt employees” under the FLSA no longer meet the criteria is that the criteria were just changed in these proposed rules. For example, previously an employee had to make a minimum annual salary of $23,600 to be considered for an exemption. That threshold was just raised to be “equal to the 40th percentile of earnings for full-time salaried workers”, which in 2016 is projected to be $970 per week, which works out to an annual salary of $50,440.

In other words, unless you pay that store manager, human resources person, pharmacist or project manager at least $970 per week, you must switch his/her pay to an hourly rate and pay that employee overtime if he or she works more than 40 hours in any one workweek. Additionally, you should be aware that this exemption threshold number will be automatically adjusted each year, so get ready for required annual raises if you want to continue to pay that employee on salary.

The exemptions that are affected by this change are the “executive (managerial) exemption”, the “professional exemption” and the “administrative exemption”.  To claim one of these exemptions and pay that employee on a salary, not only will you have to pay that employee at least $970 per week in 2016, but you will also have to determine if that employee is performing exempt duties:

  • An exempt executive is in charge of at least two full-time employees, has a primary duty of management (interviewing, evaluating, scheduling and budgeting instead of ringing up sales or waiting on customers) and has significant input into hiring and firing.
  • An exempt professional is exactly what you would expect: a doctor, lawyer, dentist, architect, veterinarian, pharmacist, etc. Professionally exempt work means work which is predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment. It almost always involves an advanced college degree beyond just a bachelor’s degree. “Creative professionals” include actors, musicians, composers, artists, novelists, and most journalists, and are exempt without the advance degree, but do require talent.
  • An exempt administrative employee who meets the exemption is someone who performs office or non-manual work directly related to the general business of the company (not the sales or customer service aspects), and who exercises independent discretion and judgment on significant matters. The administrative exemption usually covers human resources, finance, tax, quality control, relocation advisers, marketing, public relations and compliance jobs. That means that the administrative exemption does not apply to secretaries, runners, office help, accounting clerks, and many other office personnel.

There are some FLSA exemptions that are not affected by this salary change. Teachers, for example, are considered professionals if they actually spend their time in academic instruction, but have no minimum salary requirement. Outside sales people do not have to meet the salary requirement to be exempt, but they do have to spend most of their time away from the business actually calling on customers. Professional truck drivers, farmworkers, cattle feeders, ranchhands, airline employees, houseparents, livestock auction workers, newspaper deliverers, seasonal amusement park employees, railroad employees, and a few other job classifications are exempt from the overtime rules without being paid the minimum salary of $970 per week.

Is there any way you can just pay enough to an employee so that you don’t have to worry whether that employee’s duties meet the FLSA exemption tests? Yes, if you pay that employee $122,148 per year. “Highly compensated” employees, who don’t have to meet the duties test, are automatically exempt from overtime requirements. The salary minimum for highly compensated employees was just raised to $122,148, from the previous $100,000.

Decisions relating to FLSA are not for the faint-hearted or the uninformed. I’ve been dealing with the FLSA for more than 20 years and it can be tricky at times. All business owners and managers need to get quickly educated about these issues and also rely heavily on their employment lawyers and accountants. Together you should do an individual exemption analysis on each and every employee to whom you pay a salary. You have the next several months to do this while these proposed rules by the DOL are finalized (they won’t substantially change during that process) and are reviewed by other agencies before they go into effect sometime in early 2016.

The first question to ask with every employee you hire and each current employee is, “Am I paying this employee enough to meet an exemption?” If you are, then you and your employment lawyer should analyze that employee’s duties to make sure the employee is actually exempt. If both the salary and the duties don’t qualify that employee for an FLSA exemption, then it is time to pay that employee on the basis of an hourly rate and overtime of one and one-half times their hourly rate for any time worked over 40 hours in any one workweek beginning in 2016.

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