Fair Labor Standards Act Updates Effective December 2016
Aug 25, 2016 08:30AM
● By MED Magazine
By Morgan Brekke
Among its various functions, the Fair Labor Standards Act (“FLSA”) establishes minimum wage and overtime pay requirements that apply to employees in the private sector and in Federal, State, and local governments. See 29 U.S.C. § 201, et seq. Under the FLSA, covered employees are entitled to be paid at least the Federal minimum wage, which currently is set at $7.25 per hour, and at least one and one-half times their regular rates of pay for all hours worked over forty in a workweek, unless an exemption applies.
Some of the primary exemptions from the FLSA’s minimum wage and overtime pay requirements are available for individuals employed in bona fide executive, administrative, or professional capacities or as outside sales or computer employees (“white collar exemptions”).
To qualify for one of these exemptions, an employee must meet the requirements set forth in the Department of Labor’s regulations implementing the FLSA, which include the following main requirements: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction based on variations in the quality or quantity of work performed (“salary basis test”); (2) the salary amount paid to the employee must meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties or the duties of an outside sales or computer employee as defined by the regulations (“duties test”). See 29 C.F.R. § 541, et seq. The FLSA also includes an exemption for highly compensated employees, i.e., those employees who receive an annual compensation that is equal to or exceeds the minimum amount specified by the Department of Labor and who customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.
In 2014, President Barack Obama directed the Department of Labor to update and modernize the regulations implementing the white collar exemptions and the highly compensated employee exemption. Prior to receiving this order, the Department of Labor had last revised these regulations in 2004, at which time it set the weekly salary level requirement for the white collar exemptions at $455.00 ($23,000.00 annually) and set the total annual compensation requirement for the highly compensated employee exemption at $100,000.00. Since 2014, the Department of Labor has complied with the President’s order by proposing revised regulations, considering comments to its proposed revisions, and ultimately issuing its Final Rule on May 23, 2016.
The most notable changes under the Final Rule pertain to increases in the salary amount needed under the white collar exemptions and the compensation amount required for the highly compensated employee exemption. Specifically, the Final Rule sets the minimum salary level for the white collar exemptions at $913 per week ($47,476 annually) and the total annual compensation for the highly compensated employee exemption at $134,004.00. It also establishes a mechanism for automatically updating the salary and compensation levels every three years in order to ensure that they continue to provide useful and effective tests for exemption. Moreover, the Final Rule amends the salary basis test in a manner that now allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to ten percent of the new salary level, so long as those amounts are paid on a quarterly basis. The Final Rule, however, makes no changes to the duties tests of the various white collar exemptions or to the highly compensated employee exemption.
In light of the Final Rule, employers subject to the FLSA need to review the salaries of all employees they currently classify as exempt pursuant to the FLSA’s white collar or highly compensated employee exemptions. To the extent an employee’s salary level or annual compensation does not comply with the revised exemptions, employers have various options. Specifically, the Department of Labor’s Wage and Hour Division has identified the following alternatives for employers to use in implementing the updated salary level requirement:
1. Increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
2. Pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
3. Reduce or eliminate overtime hours;
4. Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
5. Use some combination of these responses.
See United States Department of Labor-Wage and Hour Division, Final Rule: Overtime, Question and Answers, https://www.dol.gov/whd/overtime/final2016/faq.htm.
Regardless of how an employer chooses to implement the requirements of the Final Rule within its organization, employers must comply with the Final Rule by December 1, 2016. Accordingly, employers who may be impacted by the new regulations should begin preparations for compliance now to ensure that they meet the deadline. Consultation with an employment law attorney for further guidance on the Final Rule, as well as with all other aspects of the FLSA, also is recommended.
Morgan Brekke is an attorney at Woods, Fuller, Shultz & Smith P.C. She focuses primarily on employment and health law matters.
 Employers should be aware, however, that individual states and cities may adopt minimum wage or overtime laws that provide higher standards than the FLSA. In situations where an employee is subject to both the state and federal minimum wage or overtime laws, the employee is entitled to minimum wage or overtime pay according to the higher standard, i.e., the standard that is most beneficial to the employee.