New Overtime Rules for Non-Exempt Employees: Are Your Employees Properly Classified?

As year-end looms in the distance, it is critical that employers focus on the upcoming changes to the Fair Labor Standards Act (“FLSA”), which become effective December 1, 2016.

Overview:
On May 18, 2016, the U.S. Department of Labor (“DOL”) announced the publication of its Final Rule updating the FLSA overtime regulations.  Significantly, the Final Rule modifies the minimum salary that must be paid to salaried employees in order to qualify as an exempt employee not eligible for overtime pay.  Effective December 1, all salaried, exempt employees must be paid a minimum of $47,476 annually, which is an increase from the current level of $23,660.  The Final Rule does allow employers to include nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the minimum exempt salary level, while also establishing a mechanism for automatic updates to this minimum salary level every three years in order to maintain a threshold comparable to a standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (which is currently the south). Finally, with respect to highly compensated employees subject to a minimal duties test, the DOL’s Final Rule raises the minimum total annual salary level from $100,000 to $134,004.

Reaction to the Ruling:
There are currently efforts under way to derail enforcement of the Final Rule, including two separate lawsuits filed on September 20 in federal court in Texas on behalf of 21 states and the U.S. Chamber of Commerce, arguing that the DOL abused its authority and the Final Rule violates federal law. Likewise, the National Federation of Independent Business (NFIB) sent a letter earlier this month petitioning the DOL to delay implementation of the new law until June 1, 2017. Also, there are bills pending in the U.S. Senate and House of Representatives seeking to delay or block enforcement of the new law. As expected, however, the DOL and President Obama are opposing all efforts to delay the new law, and at least for now, employers should anticipate and plan for the upcoming changes.

How to Determine Exempt Status:
As a starting point, all employees are considered non-exempt and are eligible for overtime. In order for employees to be properly classified as exempt from these requirements and therefore not eligible for overtime, they must meet all three of the following tests:

• The salary basis test: employee must be paid on a salary basis not subject to reduction based on quality or quantity of work (as opposed to payment on an hourly basis).
  
  
• The salary level test: employee must be paid (effective December 1) an annual minimum salary of $47,476, or $913 per week.
  
  
• The primary duty test: the employee’s primary job duty must involve the kind of work associated with one of the exemptions: executive, administrative, professional, computer or outside sales.

The Final Rule only addresses the salary level test, and the regulations defining the primary duty exemptions remain unchanged. However, in light of the current focus on properly determining employee eligiblilty for overtime compensation, now is an excellent time for employers to audit their exempt/non-exempt classifications to confirm that exempt employees also meet the one of the primary duty exemptions.

Next Steps for Employers:
All employers, regardless of size or location, should take the following steps to maximize compliance by December 1:

• Determine whether you have any salaried employees who are not currently eligible for overtime who are earning less than $47,476.
  
  
• If you have any such employees, determine whether you are going to either reclassify those employees as non-exempt, so that they become overtime eligible, or raise their annual salary to at least $47,476 (which may include nondiscretionary bonus and commissions).
  
  
• Finally, even if you raise a salary to preserve exempt status, you should also confirm that the employee meets one of the duties tests to qualify for exempt status. While the Final Rule did not amend any of these tests, now may be a good time to confirm that all exempt employees are paid the minimum annual salary ($47,476) AND meet the eligibility requirements under the duties tests for the executive, administrative, professional, computer or outside sales exemption.

If you would like more information or require assistance, please contact one of our employment attorneys, Amy Katz ([email protected]); Jacqueline Piscitello ([email protected]) or Christine Zebrowski([email protected]).