Countdown to Compliance: DOL Limits Exemptions and Expands

Overtime Eligibility

Amy L. Hemenway, Esq. ahemenway@hselaw.com

716-844-3737

Overview

U.S. Department of Labor published final rule on May 23, 2016.

Revises the regulations for implementing the exemption from minimum wage and overtime for certain “white collar” executive, administrative, and professional employees

Increases salary threshold required for exempt status

Allows employers to count non-discretionary bonuses and incentive payments toward the salary threshold in certain circumstances

Establishes procedure for automatic adjustments every three years

Takes effect December 1, 2016

Today’s Agenda

Background - FLSA overtime and coverage requirements

Summary of white collar exemptions

Description of key changes in final rule

What now? - discussion of options

Examples

FLSA Overtime Rule

Unless specifically exempted, employees covered by the FLSA must receive “overtime pay” for all hours worked in excess of 40 in a workweek

Overtime rate is one and one-half times regular rate of pay

Overtime is intended to reduce the detrimental impact of “overworking” employees by incentivizing employers to hire and spread hours over more workers

Question

Are all employers covered by the FLSA?

No, but the vast majority of employers and employees are

Two types of coverage under the FLSA – enterprise coverage and individual coverage

Caveat – even if the FLSA does not apply, the New York State Labor Law’s minimum wage and overtime requirements likely still apply

Enterprise Coverage

An enterprise is covered when it has annual sales or business of at least $500,000 in interstate commerce

Certain “named enterprises” are covered regardless of annual sales volume, including hospitals, schools and preschools, government agencies, and businesses providing medical or nursing care for residents

Individual Coverage

Individual employees may be covered - even if their employer is not a covered enterprise - if they engage in interstate commerce or in the production of goods for interstate commerce

Examples of covered activities: making out-of-state phone calls; receiving/sending interstate mail or electronic communications; ordering or receiving goods from an out-of-state vendor; handling credit card transactions or performing the accounting or bookkeeping for such activities

Question

What about non-profit organizations? Are they covered?

No automatic exclusions based on business type and no special rules for non-profit organizations

However, non-profit charitable organizations are not covered unless they engage in ordinary commercial activities for business purposes (e.g., running a gift shop)

Even if a non-profit organization doesn’t satisfy the annual sales for enterprise coverage, individual employees may still be covered if they are engaged in interstate commerce activities

Exemptions from Overtime

To qualify for exemption, white collar employees generally must satisfy three tests:

Salary Basis - Paid a predetermined and fixed salary each week that is not adjusted because of variations in the quantity or quality of work performed;

Salary Level - Paid at least a minimum salary level set by regulation (employees can be paid more); and

Primary Duty - Job primarily involves performing executive, administrative, or professional duties, depending on the nature of the exemption.

Exemptions are premised on the belief that exempt workers earn salaries well above the minimum wage, enjoy greater levels of benefits, and have better opportunities for advancement and job security.

Exempt Categories

White Collar/EAP – Executive, Professional, Administrative

Highly Compensated Employee (HCE)

Certain Computer Professionals (minimum hourly rate)

Certain Outside Sales Professionals

History of Exemptions

Exemptions were first enacted in 1938

Amended eight times since, including 2016 amendment

Changes in salary level

Changes in duties tests

Addition of exempt categories

History of Exemptions

Year Executive

(Long Test) Administrative

(Long Test) Professional (Long Test)

All (Short Test)

All (Standard

Test) 1938 $30 $30 1940 $30 $50 $50 1949 $55 $75 $75 $100 1958 $80 $95 $95 $125 1963 $100 $100 $115 $150 1970 $125 $125 $140 $200 1975 $155 $155 $170 $250 2004 $455

2016 $913

Key Changes in Final Rule

Increase to minimum salary level for executive, administrative, and professional employees

Limited use of non-discretionary bonuses, incentive payments, and commissions to satisfy minimum salary requirement

Increase to minimum salary level for highly compensated employees

Automatic adjustments to minimum salary level

Effective December 1, 2016

What hasn’t changed?

Final rule focuses on exemptions for white collar and highly compensated employees

Does not change requirements for outside sales employees

Does not change requirements for hourly exempt computer professionals

Does not add or delete exempt categories or professions

Does not alter job duties tests

Current Salary Level Threshold

Federal threshold: $455 per week or $23,660 annually

New York threshold: $675 per week or $35,100 annually

DOL concern that minimum wage is too close to the salary threshold, eroding the beliefs on which the exemptions were premised.

Year NYS Upstate

Minimum Wage

40 Hours 45 Hours 50 Hours

2016 $9.00 $18,720 $22,230 $25,740

2017 $10.40 $21,632 $25,688 $29,744

2018 $11.10 $23,088 $27,417 $31,746

2019 $11.80 $24,544 $29,146 $33,748

2020 $12.50 $26,000 $30,875 $35,750

New Salary Level Threshold

40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region

$913 per week or $47,476 annually

Based on 2015 Q4 BLS data for the South Census Region

Lower than the threshold in proposed rule, but still a 101% increase for employers currently subject to the $455 minimum, and a 35% increase for employers in New York subject to the $675 minimum

40th percentile nationally is $972, and the 40th percentile in the highest-earning wage Census Region (currently the West) is $1,050

Non-Discretionary Payments Count

Employers can count non-discretionary compensation such as bonuses, incentive payments, and commissions toward the minimum salary threshold.

Must be paid at least quarterly

Cannot exceed 10% of the minimum salary threshold

Not previously permitted to count these types of payments

Non-Discretionary Payments Count

Annual Quarterly Monthly Weekly

Minimum Total Salary

$47,476.00 $11,869.00 $3,956.33 $913.00

Max Bonus (up to 10% of minimum)

$4,747.60 $1,186.90 $395.63 $91.30

Remainder to Be Paid on Salary Basis

$42,728.40 $10,682.10 $3,560.70 $821.70

Question

What if the criteria for a non-discretionary payment are not met? Do I have to make up the difference?

Yes, employers must “true up” an employee’s compensation

No later than one week after the end of the quarter if the salary paid plus any non-discretionary payment falls short of the minimum required threshold

$47,476 / 4 quarters = $11,869 per quarter minimum salary

Example

Suzie performs exempt work as an office manager for A Corp. Her annual salary is $45,500. She is eligible for a non-discretionary bonus of up to $5,000, to be paid in equal installments of up to $1,250 per quarter, provided A Corp. meets its predetermined revenue targets. A Corp. pays 35% of the target bonus in Q2, 50% in Q3, and 100% in Q4. No bonus is paid in the first quarter because the eligibility criteria are not met. Suzie’s total compensation will be $48,363.

First Quarter Second Quarter Third Quarter Fourth Quarter Annual Total

Minimum Salary ($47,476)

$11,869 $11,869 $11,869 $11,869 $47,476

Annual Salary ($45,500)

$11,375 $11,375 $11,375 $11,375 $45,500

Bonus Paid $0 $437 $625 $1,250 $2,312

True Up Amount Owed

$494 $57 $0 $0 $551

Total Paid $48,363

Example

Bill also works for A. Corp in an exempt role. His salary is $48,000 and he is eligible for the same bonus as Suzie. Bill’s total compensation would be $50,312.

Suzie receives $551 in compensation that Bill does not receive because of “true up” amounts owed.

First Quarter Second Quarter Third Quarter Fourth Quarter Annual Total

Minimum Salary ($47,476)

$11,869 $11,869 $11,869 $11,869 $47,476

Annual Salary ($48,000)

$12,000 $12,000 $12,000 $12,000 $48,000

Bonus Paid $0 $437 $625 $1,250 $2,312

True Up Amount Owed

$0 $0 $0 $0 $0

Total Paid $50,312

Highly Compensated Employees

Current Salary Threshold - $100,000 annually

New Salary Threshold - 90th percentile of earnings of full-time salaried workers nationally

Works out to $134,004 annually

Based on 2015 Q4 data

Must pay at least the weekly minimum salary otherwise required for white collar workers ($913)

Cannot use non-discretionary bonus or incentive compensation to cover this portion, but can use it to cover the difference between $47,476 and $134,000

Automatic Adjustments

Final rule calls for adjustments to the salary thresholds every three years using the same methodology (40th percentile for white collar; 90th percentile for HCEs)

First adjustment will take effect January 1, 2020

DOL will publish the new thresholds on its website and in the Federal Register at least 150 days in advance

Based on historic data, thresholds on January 1, 2020 would rise to $984 per week (or $51,168 annually) for white collar exemptions, and $147,524 for HCEs

Proposed rule suggested annual adjustments based on the percentile methodology or rises in the CPU

Duties Test – Good and Bad

Good news - although the DOL requested comments concerning whether the duties test should change, the final rule retains the existing test without change

Bad news – DOL did not provide any guidance or clarification

While there are no changes to the duties test, this is a good time to review job descriptions versus actual duties to reconfirm that individuals classified as exempt are actually performing exempt work

Question

Are there any groups exempt from compliance with the final rule?

DOL issued a time-limited non-enforcement policy for providers of Medicaid-funded services for individuals with developmental or intellectual disabilities in residential homes and facilities with 15 or fewer beds

DOL will not enforce the $913 per week salary threshold for this subset of employers until March 17, 2019

New York minimum salary will still apply ($675 per week)

Final Rule’s Impact – According to DOL

The impact of the rule will depend, in large part, on how employers respond.

Strengthens overtime protection for other workers, including those who may have satisfied the salary test but not the duties test, and therefore, were misclassified

Reduces litigation

Reduces uncertainty about future overtime and lack of pay

Improved work-life balance

Better health

Reduction in social assistance expenditures

Employment spreading

Macroeconomic benefits because workers may have more money to spend

What now?

Review exempt positions with salaries below or near the $47,476 annual threshold

– Opportunity to review all exempt positions even if salary exceeds threshold

Determine course of action for affected employees

Consider whether other employees are impacted indirectly – compression and morale

Prepare communications strategy, including new WTPA notices

Ensure implementation on or prior to December 1, 2016

Options for Employees Below New FLSA Threshold

Option 1: Increase salary to maintain exempt status

Option 2: Convert to non-exempt status

Option 3: Consider fixed salary for fluctuating workweek

NOTE: THIS IS NOT A CURE-ALL REMEDY AND IS VIEWED SKEPTICALLY BY THE DEPARTMENT OF LABOR

OPTION 1: Increase Salary

Good option if close to threshold and regularly works over 40 hours per week, or if overtime is excessive and other options are not feasible

Don’t forget about salary basis and duties tests

Increasing the salary of an employee who does not meet the other tests will just increase your damages!

Annual Quarterly Monthly Weekly

Minimum Total Salary

$47,476.00 $11,869.00 $3,956.33 $913.00

Max Bonus (up to 10%)

$4,747.60 $1,186.90 $395.63 $91.30

Remainder to Be Paid on Salary Basis

$42,728.40 $10,682.10 $3,560.70 $821.70

OPTION 2: Convert to Non-Exempt (Hourly)

Easy option if increasing salary to maintain exemption is cost-prohibitive

Track hours and pay on an hourly basis

– Hourly rate can be adjusted upward or downward on a prospective basis

Keep in mind future minimum wage increases

Also remember minimum wage orders for specific industries

OPTION 2: Convert to Non-Exempt (Other)

Non-exempt employees can also be paid a weekly salary, or, in certain circumstances, a commission or piece rate

– OVERTIME STILL APPLIES

Overtime is based on REGULAR RATE, not simply hourly rate

– Regular rate includes “all remuneration for employment paid to, or on behalf of, the employee”

– May include other payments, like non-discretionary bonuses and commissions

– Payments excluded from regular rate are specified in Section 7(e) of the FLSA

Option 3: Fixed Salary for Fluctuating Workweek

Adopting fixed salary for fluctuating workweek pay method for certain non-exempt employees may save money

Method of pay for non-exempt that allows hours in excess of 40 to be paid at half time rather than time and a half

PROCEED WITH CAUTION

29 CFR 778.114: “Where there is a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period, such a salary arrangement is permitted by the Act if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours he works is greatest, and if he receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half his regular rate of pay.”

Option 3: Fixed Salary for Fluctuating Workweek

To use the fluctuating workweek method:

Hours must actually fluctuate from week to week

Employee must receive a fixed salary that does not vary with the number of hours worked during the week (excluding overtime premiums)

Fixed amount must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage

Employer and employee must share a “clear mutual understanding” that the employer will pay that fixed salary regardless of the number of hours worked

Example

Employer and non-exempt employee agree employee will receive a base salary of $500 per week, regardless of the number of hours worked. Overtime will be paid at one-half regular rate if incurred.

Hours/Week Regular Rate ½ OT Rate OT Due Total Weekly Pay

40 $12.50 $6.25 $0 $500

36.5 $13.70 $6.85 $0 $500

42 $11.90 $5.95 $11.90 $511.90

39.5 $12.66 $6.33 $0 $500

46 $10.87 $5.44 $32.64 $532.64

51 $9.80 $4.90 $53.90 $553.90

38 $13.16 $6.58 $0 $500

Option 3: Fixed Salary for Fluctuating Workweek

THINGS TO CONSIDER BEFORE ADOPTING FLUCTUATING WORKWEEK

DOL and courts are skeptical

Employees’ hours must truly fluctuate (and many weeks should be below the 40 hour threshold)

– Pre-determined/set schedules are often evidence against

Payment of certain incentives or bonuses can undermine argument that salary is fixed

Some states may prohibit

TALK TO YOUR ATTORNEY!

Communicating Changes

New rules

Looked organization wide, not just where required to make changes

Focus on change in eligibility – overtime ineligible versus overtime eligible

Explain impact in a positive way

Show employee that he/she will not “lose” pay

Don’t focus on change in status – exempt versus non-exempt

Think about separate communications to address compression and morale issues

How Does This Work in the Real World?

EXAMPLE 1: We have 3 employees who are salaried exempt at the rate of $38,500 per year. They usually work 40 hours per week, but occasionally stay late to help finish projects. This amounts to 3-4 hours per month. We can’t really afford to raise them to $47,476. What can we do?

Convert to non-exempt and pay overtime for hours over 40

Treat as hourly or salaried non-exempt with defined hours expectation

Extra cost = $27.76 per hour for overtime hours. For 3 employees at 4 hours per month = $333.12 per year

Limit overtime if possible – transfer non-essential duties

Fluctuating workweek will likely not apply

How Does This Work in the Real World???

EXAMPLE 2: We have 4 employees who are salaried exempt. Their salary is $41,500 and they work on average 50 hours per week. What are our options?

Increase salary to reach threshold = $23,904 for four employees

Overtime hour = $29.93 = 800 OT hours to justify threshold

Limit overtime by shifting non-essential work to other employees

Hire another employee to do some of the work

Consider fluctuating workweek method (but may be difficult if employees regularly average 50 hours per week because no fluctuation)

How Does This Work in the Real World???

Keep salary but lower the number of expected hours and pay OT if employee works more than expected

Expected Hours Hourly Rate Overtime Rate 40 Hours 45 Hours 50 Hours

40 $19.95 $29.92 $41,500 $49,279 $57,058

45 $16.80 $25.20 $34,944 $41,500 $48,048

50 $14.51 $21.76 $30,181 $35,837 $41,500

QUESTIONS?