John Gasele

Uncertainty in Overtime Requirements

Employers face great uncertainty with respect to payment of overtime right now.  New regulations from the U. S. Department of Labor were to raise the salary requirement for exempt employees to $47,476 on December 1, 2016.  However, a federal district court judge in Texas imposed a nationwide injunction halting implementation of the new regulations.  We know from similar cases that the higher salary requirement could become retroactive back to December 1, 2016 if the courts ultimately uphold the regulation.  What is an employer to do in the meantime?  This article discusses the salary and other requirements for exempt employees and suggests, at a minimum, that employers who have delayed raising salaries to the level of $47,476 require their employees to provide time records each pay period, even if the employees are currently working as exempt employees under the old rules.

The Fair Labor Standards Act (“FLSA”) is the federal law that requires employers to pay overtime to certain employees.  Under the FLSA, exempt employees are paid an annual salary, and don’t receive overtime for working more than 40 hours in a week.  Non-exempt employees are paid an hourly wage or salary, and receive overtime pay of 1.5 times their hourly wage for each hour they work beyond 40 in a week.  The regulation raising the minimum salary for an exempt employee was set to change on December 1, 2016, but a group of states and businesses challenged the new regulation.  The injunction, issued on November 22, 2016, blocked the change from taking effect.

The new regulation, if it survives the lawsuit, will only impact your business if the FLSA applies to you.  In general, the FLSA applies to employers with annual gross receipts of at least $500,000.  But the FLSA can also apply to individual employees of smaller businesses if the employee is regularly engaged in interstate commerce (as opposed to intrastate commerce, which never crosses state lines), is in an industry regulated by Congress, or has job duties related to producing goods for interstate commerce.  The FLSA also applies to some employees of hospitals, schools, and some businesses that provide medical or nursing care, regardless of their gross receipts or status in interstate commerce.   Public agencies may also be covered by the FLSA.

Three tests must be examined to determine whether an employee is exempt from overtime.  If the employee doesn’t meet all three tests, overtime is required under the FLSA.

First, the employee must be paid a salary.  Under the FLSA, a salary is a fixed amount that can’t be changed because of variations in the amount or quality of work performed.

The new regulation changed the second test, which is the salary paid to the employee.  If the change survives the lawsuit, as of December 1, exempt employees must receive at least $47,476 per year ($913 per week).  Under the old regulation, the minimum salary was $23,660 per year ($455 per week).

The third test is whether the employee’s primary job duties fit within a set listed in the regulations.  Those categories are executive, administrative, professional, or outside sales.  Each category has its own set of job duties, which employers should review.  Job titles and written descriptions don’t matter here; the question is whether the actual job duties fit the exempt categories.

The Department of Labor appealed the order issuing the nationwide injunction.  If the injunction is overturned, the new regulation will apply to all employers subject to the FLSA.  As of the date of this writing, the Department of Labor has asked the appellate court for an expedited hearing, but no hearing has been held.  This leaves employers in a state of uncertainty.  The new regulation may or may not be upheld, and it will be some time before we know.  In the meantime, you should determine whether the change impacted your business, and if so, take precautions.

Determining whether the change will impact your business if it is upheld requires a few steps.  First, figure out if you are subject to the FLSA.  If so, verify that your current exempt employees’ job duties fit within the FLSA exemptions.  If not, bring them into the exemptions or start paying overtime for hours worked over 40 in a workweek.  You need to do this regardless of the injunction.  If the job duties do fit within the exemptions, but the salary is lower than $47,476 per year, what you will need to do depends on the outcome of the lawsuit.

Unfortunately, we don’t know if the regulation will stand.  The incoming administration could choose not to defend against the lawsuit, which would leave the old salary requirement in effect.  If that happens, you won’t need to do anything.  If the new administration does defend the regulation, the appellate court could either let the injunction stand or overturn it.  Either result is likely to head to the Supreme Court.  The question is what to do if you’ve made changes already, or if the regulation is ultimately upheld.

If you have not made changes, you don’t need to right away, unless you’ve already made commitments to employees.  You do, however, need to require employees that are exempt under the current regulations to track the time they have worked since December 1.  We know from prior cases that the effective date of the new regulation may not be changed if the regulation survives the lawsuit.  As a result, an exempt employee may be owed overtime for the period between the new regulation becoming effective and when their salary was increased.  Having these employees track their time now will provide vital information in case the rule becomes retroactive to December 1, 2016.

You have a few options if the rule stands.  First, the annual salary of exempt employees could be raised to $47,476.  Second, you could pay the current salary, track the hours worked by the employee, and pay overtime for hours worked beyond the first 40 in any workweek.  Third, you could continue to pay the current salary, but eliminate any overtime by changing work schedules, redistributing job duties, or hiring additional employees.  Fourth, you could move the employee to an hourly rate and pay overtime as needed.

Many employers have already taken steps to implement the new rule.  If you have increased salaries, it may be best to leave them in place while the lawsuit is pending.  Removing increases will impact morale, and could produce wage and hour complaints.  And if the regulation stands, you may need to change back to the higher salary or make some of the other changes described above.  If employee benefits are linked to exempt or non-exempt status for 2017, employees may have already enrolled in benefits based on their expected status.  Making changes to exempt status now may impact those benefits.

The FLSA is a very complicated wage and hour law, and the uncertain future of the regulation only makes things more difficult for employers.  This article only provides an overview of the new salary requirement and some options for handling the uncertainty.  Please consult an employment law attorney if you have questions or concerns as you prepare for the new salary requirement to take effect.

John Gasele is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the area of Employment, Utility, Business, Trademark, and Internet law. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.