Immediate Changes in Overtime Laws Are Here. Are You Prepared?
The Fair Labor Standards Act (or FLSA) guarantees a minimum wage for all hours worked during the workweek and overtime premium pay of not less than 1.5 times the employee’s regular rate of pay for those hours worked in excess of 40 in a single workweek. Unlike most other federal employment laws, the FLSA provides protections for individual employees throughout the U.S. rather than imposing blanket restrictions on all employers. It is estimated that the Act currently covers over 130 million US workers today, meaning that the vast majority of Texas employers are required to comply with the FLSA.
However, even if an employee is covered by the FLSA, there are a number of exemptions in the Act that exempt certain employees from entitlement to overtime pay. One of the most common exemptions is commonly referred to as the “white collar” exemption. In order for an employee to be exempt from overtime pay under the FLSA’s white collar exemption, the employer must show that the employee meets three separate tests: (1) the salary basis test; (2) the standard duties test, and (3) the salary level test.
The first of these tests is fairly self-explanatory: the employee must be paid on a salary basis that is not subject to reductions based on quality or quantity of work.
In order to show that an employee meets the standard duties test, the employee’s primary job duties must involve the kind of work associated with executive, administrative, or professional employees. The following types of employees meet the standard duties test: (1) employees that primarily perform work that either requires advanced knowledge in a field of science or learning (usually obtained through a degree), or that requires invention, imagination, originality, or talent in a recognized field if artistic/creative endeavor; (2) employees that manage the work of at least two full time employees and have the authority to hire or fire other employees; and (3) employees where their primary duty is performance of office work directly related to management or general business operation and requires their independent judgment and discretion.
As you can see, it may be difficult for employers to identify its’ employees’ daily duties and fit them into one of these exempt categories. Often in small and mid-sized businesses, employees will take on or share some of these characteristics without fully meeting the test. This is why maintaining an up-to-date job description for each employee position is imperative for employers’ FLSA compliance.
And even when the employee meets both the salary basis test and the standard duties test, the employer must also pay them a minimum weekly salary level in order for the employee to be exempt from overtime pay under the white collar exemption. As of this day, the minimum salary level for this overtime exemption is $455 per week (or $23,660 annualized). This $23,660 annual salary has remained unchanged for over a decade. So, as long as the otherwise exempt employees made over this threshold amount, employers did not have to pay time and a half or maintain adequate hourly work records for their exempt salary employees. But earlier this year, the U.S. Department of Labor issued it’s final rule raising the minimum salary level to $913 per week (or $47,476 annualized) effective December 1, 2016. Employees making less than $47,476 ($913 per week) will now qualify for overtime pay if they work more than 40 hours a week, regardless of their job title.
This is the first update to the minimum salary level in over a decade, and is expected to extend the requirement for overtime pay to over 4 million U.S. workers by December 2017. This will increase the percentage of full-time salaried employees that will be eligible for time and a half from 7% to 35%. It’s important for employers to prepare for the additional compliance that will come with such a change. Previously exempt managers and office professionals not entitled to overtime will see a bump in their paychecks if they continue to work 40+ hours per week. More, employers who choose not to raise these employee’s outright salaries will now be required to keep hourly time records for formerly exempt employees.
It will be up to the employer to determine whether overtime eligibility actually translates into overtime hours. Employers will have three options for those employees that work over 40 hours per week: (1) raise salaries to make employees exempt from overtime, (2) maintain hourly work records for salaried employees and pay time and a half overtime, (3) limit or cut salaried employee hours to a maximum of 40 hours to make sure that employees do not receive overtime, or (4) maintain hourly work records for salaried employees and lower base salary to offset overtime.
Whichever method of compliance the employer chooses, immediate action needs to be taken to ensure that your business is ready for this change. Penalties for violating the FLSA can include civil fines, orders to pay back wages, and even criminal prosecution and jail time. If you are an employer who is less than prepared for this change, call to set up a consultation with us today. December 1, 2016 is right around the corner.