Fair Labor Standards Act: Overtime Pay
Yesterday, the Department of Labor (DOL) released its final changes to Part 541 of the Fair Labor Standards Act (FLSA) which relates to overtime exemptions. News outlets have been reporting widely on the potential for this change for over a year and it has received significant amounts of opposition from the Society for Human Resource Management (SHRM) and business owners alike. For the most part, business owners opposed the mandated increase in salary for exempt employees and the automatic increases that will take effect every three years. Press attention connecting this DOL ruling to employee welfare and the race for the Presidency has rightly amplified the discussion about this important issue - regardless of your political views.
This bulletin outlines the main things managers need to know about the final rule released by the DOL. Also included are the steps your business can take to begin to prepare for the December 1, 2016 implementation deadline. For most small to medium-sized nonprofits, the impact of this rule will have a modest financial impact. It’s a great opportunity to ensure that rolesare correctly classified and compliant with FLSA rules.
For a start, let’s make sure the difference between exempt and nonexempt is understood.
Most job in the United States are covered by the Fair Labor Standards Act. Classification as exempt or nonexempt relates to eligibility to receive overtime pay.
You can remember it as EXEMPT employees are EXEMPT from receiving overtime pay because they are salaried. NONEXEMPT employees are paid hourly based on the precise amount of time they work each week.
By Federal law, nonexempt employees must receive pay of no less than time-and-a-half for hours worked in excess of 40 hours in a single pay week. Local and state wage laws can increase this requirement, as is true in the case of California where overtime is due when a nonexempt employee works more than eight hours in a single day.
Employees are categorized as exempt or nonexempt based on three conditions. Most employees must pass all three of the following tests to be considered exempt (salaried).
- Salary LevelTest: Is the rate of pay above the threshold required to be considered exempt? The new Part 541 rule raises the threshold from $455 per week ($23,600 per annum) to $913 per week ($47,476 per annum).
- Salary Basis Test: Can the employee count on a “guaranteed minimum” amount of pay for any workweek in which she performs ANY work?
- Duties Test: Does the employee perform exempt job duties that fit the FLSA definitions of executive, professional or administrative? Referring to guidance notes is important as the determination is made based on job tasks (such as supervision of other employees and/or level of authority) but also by schooling in the case of professions such as lawyers and accountants.What to Know About the New DOL Part 541 Ruling
What to Know About the New DOL Part 541 Ruling
With the definitions of exempt and nonexempt in mind, here is what you need to know about the changes to the overtime rules finalized by the DOL yesterday.
- Salary threshold increased to $913/week ($47,476/year) The minimum salary used in the Salary Level Test has almost doubled. Employees who meet the Salary Basis Test and the Duties Test, but are currently being paid salaries under $47,476 per year will require a pay increase if they are to maintain their exempt status.
- Automatic increases to the salary threshold will take effect every 3 years Adjustments of the salary threshold will be made every three years to maintain the wage at the 40th percentile of whatever reporting region has the lowest-wage for 40 hour-per-week workers in the United States Census. Although this sounds complex, it just means that the DOL is benchmarking the salary threshold to the Census and setting the rate for the nation based on the region with the lowest average rate of pay for full time workers.
- Duties Test is unchanged Today’s change doesn’t impact the Salary Basis Test or the Duties Test. The change relates to the minimum salary under which an employee can be considered exempt and not entitled to overtime pay.
- Effective date is December 1, 2016 The DOL traditionally gives 60 days for the implementation of its rulings and the same is true here. Businesses should begin reviewing their workforces immediately to determine which employees are impacted, whether or not these employees need to be reclassified and how best to communicate changes to impacted employees.
- Highly Compensated Employee (HCE) Exemption is now $134,004 per annum Employees earning at the 90th percentile or above of salaried workers nationally will automatically be considered exempt.
Sound employee classification practices are a key component of a well managed business. We recommend using the next 60 days to review effected employees, but also to reflect on your overarching pay practices, role descriptions and title bands to ensure that they are matched to the organization you are operating today. Many will find that their practices were created years ago and reflect organizational needs that are not well aligned to current strategic goals.
Pay special attention to the peer groups created by title, pay and role descriptions. Are the peer groups homogenous by level of experience and scope of work or do they include individuals or roles that would be better represented by increasing or decreasing the level or compensation. It is important to also look at the groups to ensure that protected classes are properly compensated and there is no disparate impact (discriminatory practices that are not overt or purposeful, but that have just as real an impact on employees).
With regards to employees making under the new threshold of $47,476, you have the choice to either increase their salary, if they meet the Basis Test and Duties Tests, or to reclassify them as nonexempt. Whatever you decide, it is important that you approach similar roles across the organization in the same way in order to maintain equity and consistency in your pay philosophy.
The HR professionals at Positively Partners are here to help you work through these changes and to ensure your pay practice are compliant, fair and promote employee well-being. Please contact us today at firstname.lastname@example.org for help implementing the new rule and for support implementing pay practices that foster employee engagement and are aligned to your business’s needs.
This bulletin should not be interpreted as legal advice. Positively Partners LLC provides this content as a service to its readers, but cannot guarantee its suitability for a particular purpose. Please contact us for specific advice on application to your business needs.