Employers should be aware of a massive change to the Fair Labor Standards Act (“FLSA”). Everyone generally understands that exempt employees are paid an annual salary with no overtime for hours worked over 40 in a week, and non-exempt employees are paid an hourly wage or salary, but are entitled to overtime at 1 ½ times their hourly wage for hours worked over 40 in a week. This basic system of exempt and non-exempt employees is a product of the FLSA. On December 1, 2016, the minimum salary requirement to be an “exempt” employee increases dramatically. As of that date, an employee must generally be paid least $913 per week, or $47,476 per year to be exempt from overtime. The Department of Labor estimates more than 4.2 million workers will either receive a salary increase or overtime pay as a result of this change.
The FLSA applies to employers with annual gross receipts of at least $500,000. But it can also apply to individual employees of smaller businesses if the employee is engaged in interstate commerce (which is a business that crosses states lines), is in an industry regulated by Congress, or has job duties related to the production of goods for sale across state lines. Some employees of hospitals, schools, some businesses that provide medical or nursing care, and public agencies may also be covered by the FLSA.
The FLSA provides exemptions from overtime for workers that meet three tests. First, the employee must be paid a salary, which is a fixed amount that can’t be changed because of variations in the amount or quality of work performed.
Second, the employee’s salary must be at a minimum level. This is the test changed by the new rules. As of December 1, exempt employees must receive at least $913 per week, or $47,476 per year. This is just over twice the current minimum salary, which is $455/week or $23,660/year. Up to 10% of the salary may be from non-discretionary bonuses or incentive payments, as long as they are paid at least quarterly. The base salary level is not required for professionals such as doctors, lawyers, or teachers. The required salary will be adjusted every three years, starting on January 1, 2020.
Third, the employee’s primary job duties must fit within an exempt category such as: executive, administrative, professional, or outside sales. Each category has its own specific rules, which employers should review carefully. Job titles don’t matter here; the primary question is whether the actual job duties fit the exempt categories. This is a good time to consider revising job descriptions to match the exemption rules.
Employers have several options to respond to the new salary requirement. To begin, verify that current exempt employees have job duties that fit within the FLSA exemptions. If not, make changes to bring them into the exemptions or plan to start paying overtime for hours worked over 40 in a workweek as of December 1, 2016. If the job duties do fit within the exempt categories but the salary is lower than $47,476 per year, an employer needs to make other changes by the deadline. First, the employer could raise the annual salary to $47,476. Second, , the employer 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, the employer could continue to pay the current salary but eliminate any overtime by changing work schedules, redistributing job duties, or hiring additional employees. Fourth, the employer could move the employee to an hourly rate and pay overtime for hours over 40 in a workweek.
The FLSA is a very complicated wage and hour law. This article only provides an introduction to the new salary requirement and some options for handling the change. 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 areas of Employment, Utility, Business, Internet and Trademark law. This article is not intended to provide legal advice. You should always consult with an employment law attorney about your specific circumstances.