Fair Labor Standards Act. The Fair Labor Standards Act (FLSA) provides American workers the right to a minimum wage and time-and-a-half pay for more than 40 hours of work in a week. The FLSA rules apply to hourly and salaried workers, but not to “white collar” workers whose salaries and duties exempt them from the overtime pay requirements.
There are two ways in which an employee can be covered by the FLSA:
1. Enterprise Coverage
Employees who work for certain businesses or organizations are covered by the FLSA. These “enterprises,” which must have at least two employees, are:
- those that have an annual dollar volume of sales or business done of at least $500,000
- hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies
2. Individual Coverage
- Employees are protected by the FLSA if their work regularly involves them in commerce between states (interstate commerce).
- Domestic service workers (such as housekeepers, nannies, and cooks) are normally covered by the law.
- The employee must be paid a fixed salary that is not subject to reductions because of variations in the quality and quantity of work performed.
- The amount of the salary paid must meet a minimum threshold amount set by DOL regulations.
- The employee’s job duties must fall under the definition of executive, administrative, or professional (EAP); the law also contains different exemption requirements for computer professionals and outside sales employees.
Tax practitioner note. The salary threshold has been updated only once since the 1970s, and currently covers only 7% of full-time salaried workers based on pay. At an annual salary of $23,660 ($455 a week times 52 weeks), workers who earned below the poverty line for a family of four exceeded the current overtime salary threshold.
New overtime rule effective Dec. 1, 2016. On May 18, 2016, President Obama and Labor Secretary Thomas Perez announced the Department of Labor’s Final Rule, 81 FR 32391, titled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.”
Note. The final rule is projected to make 4.2 million salaried workers newly eligible for overtime pay.
The final rule makes the following changes:
- Increases the standard salary level from $455 a week ($23,660 a year) to $913 a week ($47,476 a year). The standard salary level now represents the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, currently the south.
- Increases the total annual compensation test for HCEs from $100,000 to $134,004. The salary level is the annual equivalent of the 90th percentile of full-time salaried workers nationally.
- Automatically updates the salary thresholds, based on the criteria noted above, every three years. The first update will occur on Jan. 1, 2020.
- Allows for the use of nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level:
- At least $822 (90% of $913) must be paid as a weekly salary;
- Bonuses and incentive payments must be paid on a quarterly or more frequent basis;
- Discretionary bonuses (i.e., a Christmas or year-end bonus) may not be considered in reaching the $913 standard salary level.
Duties tests. The definitions of executive, administrative, and professional duties were not modified under the final rule.
1. Executive Duties
- Primary duty is management of the enterprise or of a customarily recognized department or subdivision
- Customarily and regularly directs the work of two or more other employees
- Has the authority to hire or fire other employees or recommendations as the hiring, firing, advancement, promotion or other change of status of other employees is given particular weight
- Primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers
- Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance
- Primary duty is the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction OR
- Primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor
Special rules for highly compensated employees. The duties test for HCEs is more relaxed than that which applies to a standard salaried employee. Under FLSA §13(a)(17), an employee earning more than $134,004 will be considered exempt if:
- The employee’s primary duty includes performing office or non-manual work; and
- The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
Planning for the New Overtime Rules
Business clients impacted by the new rules should act immediately to ensure compliance and avoid potential penalties and litigation claims from disgruntled employees. Options to consider in complying with the new regulations include the following:
- Increase salaries of those employees who meet the duties test to comply with the new levels;
- Consider hiring additional employees to manage the work load, thereby reducing overtime premiums;
- Reduce an employee’s base salary and add pay for overtime hours, so that the employee’s weekly pay remains constant;
- Review policies for paid time, and clearly define paid and unpaid time;
- Consider limiting employee travel time to business hours, asking employees not to work from home at night or on weekends.