The Wage and Hour Division of the Department of Labor (DOL) has updated the regulations defining who can be categorized as an exempt employee under the Fair Labor Standards Act (FLSA). The big change is that anyone earning less than $47,476 annually cannot be considered exempt and therefore must be paid overtime for any hours worked in excess of 40 per week.
Generally, the FLSA and these final regulations apply to employees of enterprises that have an annual gross volume of sales of $500,000 or more.
Under the FLSA, certain executive, administrative and professional employees can be exempt from Federal minimum wage and overtime requirements. Certain computer professionals and outside sales employees can also be excluded from these requirements.
To qualify as an exempt employee, the employee generally must meet the following tests:
- Salary Basis Test: An employee must be salaried, meaning that he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
- Salary Level Test: An employee must be paid at least a specific salary threshold, which is $913 per week (the equivalent of $47,476 annually for a full-year employee) under the new regulations, which is a significant increase from the current level of $23,660 per year.
- Duties Test: The employee must primarily perform executive, administrative or professional duties.
Certain professionals are not subject to either the salary basis or salary level tests (such as, doctors, teachers and lawyers). There is no salary level test required to qualify as an exempt outside sales employee. The new regulations also contain a relaxed duties test for highly compensated employees who receive total annual compensation of $134,004 or more paid on a salary basis. The new regulations also establish a mechanism for automatically updating the salary and compensation levels every three years.
The final regulations also amend the salary basis test to allow employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
Please remember that job titles do not determine exempt status and the fact that an employee is paid a salary does not necessarily mean that the employee will be exempt from the FLSA’s minimum wage and overtime requirements. In order for an employee to be exempt, the employee’s specific job duties and salary must meet all of the applicable requirements provided in the regulations.
The new salary requirements will take effect on December 1, 2016. Employers with exempt employees earning less than $47,476 will either need to reclassify employees as nonexempt (and pay overtime) or increase their salary.
Higher overtime costs or salaries may prompt employers to cut benefits. Since the affordability rules under health care reform will constrain increases in employee contributions for medical benefits employers may make dental, vision and disability benefits employee-pay-all benefits.