What’s the Magic Number? Final Overtime Rules Announced
Several years ago, rumors started circulating about changes to federal overtime laws, and then changes were proposed to them. Those changes were put on hold in late 2016. The hold is over. The U.S. Department of Labor (“DOL”) announced today its Final Rule regarding changes to the portion of the Fair Labor Standards Act (“FLSA”) that governs overtime, which, among other things, calls for a substantial increase to the minimum salary required to be paid to salaried exempt workers throughout the country.
The Final Rule is the culmination of a years-long effort to modernize the regulations governing the exemption of Executive, Administrative, Professional, Sales, and Computer (collectively referred to as “EAP” or “White Collar”) employees from minimum wage and overtime laws. The changes go into effect on January 1, 2020.
What is changing?
- Salary Level. To potentially be found to be exempt from overtime, beginning January 1, 2020, an employee now must be paid $684 per week or $35,568 annually on a salary basis. This is a substantial change from the current $455 per week/$23,660 annually.
- Highly Compensated Employees. The annual compensation requirement or those employees to be exempt as “highly compensated employees” under the FLSA will increase to $107,432 from the current $100,000.
- Nondiscretionary Incentive Payments. The new rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. These must be paid at least annually.
- Future Adjustments. Unlike the rule proposed in 2016, the Final Rule does not provide a mechanism to automatically update the earnings thresholds. However, the DOL has indicated an intent to evaluate, and update as needed, the earnings thresholds more frequently through rulemaking in the future.
What is staying the same?
The duties tests (explained more below) and the hours’ requirement (more than 40 per week; no daily maximum) to trigger overtime.
What do the changes mean for my business?
Many employees who pass the duties test but are paid less than $684 per week or $35,568 annually will now not be exempt and will be required to either receive overtime pay when they work over 40 hours a week or have their pay raised above the new salary threshold. It is also possible that many employers have been unknowingly violating the overtime laws and should have been paying overtime all along.
It is likely that the DOL may begin performing more audits, and that the duties tests will be subjected to a heightened level of scrutiny, even though they haven’t themselves changed.
What are the consequences of violating the law?
First of all, it is essential to note that, with some very small and rare exceptions, every employer with a minimum of one employee is required to follow the FLSA regulations for overtime.
The potential penalties for misclassifying an employee as exempt when they are not exempt can include:
- Unpaid wages + interest
- Liquidated damages, which means an additional amount equal to the unpaid wages + interest
- Attorney’s fees + court costs, if employees or the DOL bring an action against the employer
- For willful violations, an additional penalty of up to $10,000 (per offense) and 6 months’ prison (for the second offense)
What are the “Duties Tests”?
There is a common misconception that salary means exempt. Not true! Rather, an analysis of the employee’s duties must be done to determine whether an individual is exempt from overtime.
To qualify for an exemption from overtime, employees generally must be paid the minimum salary explained above AND pass a duties test. The duties test requires that the primary duties of an employee fall into one of six categories of exemption:
- Executive: primary duty involves management of department; regularly directs the work of 2+ full-time employees; authority to hire and fire.
- Administrative: primary duty involves the performance of office or non-manual work directly related to the management of business operations or customers; job requires the exercise of discretion and independent judgment.
- Learned Professional: primary duty involves the performance of work requiring advanced knowledge that is primarily intellectual in character that requires consistent exercise of discretion and judgment; advanced knowledge must be in the field of science or learning; advance knowledge customarily acquired by a prolonged course of specialized instruction.
- Computer-related: primary duty must involve the application of systems analysis to techniques and procedures; design, development, analysis, creation, testing or modification of computer systems or programs; or design, documentation, testing, creation or modification of computer programs relating to operating systems.
- Outside Sales: primary duty involves making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; the employee must be customarily engaged away from the employer’s place of business.
- Highly Compensated Employees (total annual compensation > $107,432 as of January 1, 2020) or more: primary duty includes performing office or non-manual work; and customarily performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
The FLSA provides a useful tool called the FLSA Overtime Security Advisor for employers to use to determine whether an employee is exempt from overtime laws.
If an employee does not fall into one of the categories of exemption, that employee is non-exempt. Employees that are non-exempt must be paid one-and-one-half times their regular rate of pay for each hour over 40 in one workweek, and all employees must be paid at least minimum wage for all hours worked.
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Contact Attorneys Jessica M. Kramer or Leslie Elkins for a detailed analysis of how the changes in the FLSA may affect your business and for customized advice as to how to comply with state and federal employment laws.