The “Final Rule” of the Fair Labor Standards Act: What You Need to Know

William D. Ryan, III, CPA (Sep, 2016)

Salary and wage regulations have been a regular statute for employers since the Fair Labor Standards Act (FLSA) was passed in 1938.   On December 1, 2016 the Final Rule will update the FLSA for the first time since 2004, which will effect an estimated 4 million Americans in the first year alone.  This ruling will primarily have an effect on overtime regulations, specifically in regards to employees characterized as executive, administrative, and professional employees, which are often referred to as “white collar” employees.  The Final Rule’s goal was to streamline and simplify overtime regulations in regards to which white collar employees are protected under the FLSA’ s minimum wage and overtime standards.

The Final Rule begins with updating the standard salary level, which was perviously set at $455 per week or $23,660 annually.  The standard salary level is the threshold used to establish whether or not executive, administrative, or professional (EAP) employees are exempt from overtime. The final rule will raise the threshold as of December 1, 2016 to $913 per week or $47,476 per year.  Employees do not have to be paid weekly, however an employee must be paid at an annual rate of $47,476 to qualify as exempt from overtime.   Beyond raising the standard salary level, the final rule now allows for 10% of the standard salary to be paid through commissions and incentive pay as long as the amounts are paid at least quarterly.  Second, the final rule will increase the salary of highly compensated employees (HCE) from $100,000 per year to $134,004 a year, which is the 90th percentile of earnings of full-time salaried workers nationally.   In order to be exempt as a HCE, the employee must meet a duties tests and be paid the minimum standard salary of $47,476.  The difference between the $134,004 and $47,476 can be paid through bonuses, commissions, and catch up payments.  The change to HCE levels was done to avoid unintended misclassification of high-waged employees who are not performing executive, administrative, and professional duties.   Lastly, the Final Rule set out to provide automatic updating to salary requirements every three years.   This was done to ensure that the standard salary remains a meaningful test which protects white collared employees and is consistently set at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region.   The HCE level will be also adjusted every three years as well to the threshold previously mentioned.

The key word that employers must know is exempt.  More importantly, what determines if an employee meets the criteria of an exempt executive, administrative, or professional employee (EAP)?  Job titles alone do not determine exempt status.  For example, an entry level employee with the title “Account Manager” does not automaticly meet the administrative exemption.  For an employee to meet the executive exemption the following tests must be met; they must be compensated on a salary basis of at a rate not less than $913 per week, their primary duty must be managing the enterprise or a division of the enterprise, they must manage at least two full-time employees and have the authority or ability to suggest hiring, firing, or a status change of an employee.  For an employee to meet the administrative exemption the following tests must be met; they must be compensated on a salary or fee basis of at a rate not less than $913 per week, the employee’s primary duty must be the performance of office work (non-manual) related to the management of the general business operations and include the exercise of discretion and independent judgment with respect to matters of significance.  For an employee to meet the professional exemption the following tests must be met; they must be compensated on a salary or fee basis of at a rate not less than $913 per week and the employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning or that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.  In addition to EAP exemptions, there are overtime exemptions for computer and outside sales employees as well.   It is important for employers to know that in order to meet any of the overtime exemptions, you must meet all of the tests in that category.  

With the regulations taking effect in December, the everyday challenges employers face with managing their employees’ time worked and compensation will be more thought-provoking than ever for some.   Businesses with laborers that will be effected by the new regulations will need to develop strategies for managing their workforce and compensation structure.   First and foremost, businesses must be accurately tracking their employees’ hours worked.  The FLSA, does not require employers to follow a specific method of tracking time or have an automated system or device, it merely requires record maintenance to be complete and accurate.   Therefore employers must simply develop a system of maintaining daily and weekly hourly records that best suits their needs.   

Employers should identify which employees currently meet the EPA exemptions and are earning a minimum salary of $23,660 a year and how the new standard salary of $47,476 will affect them.   For those employees effected, the employer should determine if it is more cost effective to raise an employee’s salary to or above the new minimum and keep the employee’s exempt status or reclassify that employee to non-exempt and pay them overtime if they work more than 40 hours in a week.  Some decisions will be easier than others, for instance, if an employee will regularly work more than 40 hours a week and is already near the new standard salary then it might be more advantageous to raise them to the new standard salary and keep them exempt.  However, for a currently exempt employee who is earning a salary of $35,000 a year and rarely exceeds 40 hours in a week, it would probably more beneficial to reclassify them as nonexempt and pay them overtime when they exceed 40 hours. 

For employers who are concerned with now being required to pay overtime to a new level of employees, here are a few ideas to consider.  One, limit hours worked to 40 hours a week.  While this might be easier said than done, it assures you will not be paying overtime.   Consider reorganizing workloads and schedules.   A good example of this would be to shift tasks to and from a non-exempt employee to an exempt employee, so that the non-exempt employee hours are freed up and that work passes to an employee who is exempt from overtime.   Also, employers should ensure that their staffing levels are appropriate so that periods of overtime can be avoided.    Finally communication, employers need to communicate with those in charge of managing employees’ time in order to not only ensure you know when periods of overtime are approaching, but you are remaining compliant with the new standards.

It is essential to understand that proper understanding and planning will help ease your business into the transition of these new overtime regulations.  Some will be heavily effected, others may not be effective at all, but with a strategy in place and proper recognition of key employee characteristics your business will be ready to handle whatever the Final Rule has to throw at you.  As always, please contact your Dermody, Burke & Brown advisor if you have any questions.

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