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Complying with the New FLSA Overtime Rules

What You Need to Know to Succeed

FLSA Overtime Rules Halted from Taking Effect on 12/1/2016; Future Uncertain

A federal judge issued a preliminary injunction late yesterday, November 22, 2016, which prevents the U.S. Department of Labor’s (USDOL) overtime rule from taking effect on December 1, 2016.
The fate of the overtime rules is now uncertain. It is possible the federal judge may be swayed by USDOL arguments or that an appeals court could reverse the course in the next several weeks. It is also quite possible the rules will be further delayed, completely overhauled, or altogether scrapped once President Trump takes office on January 20, 2017.

Additionally, a series of measures have been introduced in Congress hoping to prevent or stall the rule changes. While one of the proposed legislation changes would scrap the increases altogether, another proposed change would delay implementation to provide a longer period of preparation. Still another, would push the effective date for the full increase to 2019, instituting gradual increases on an annual basis for the next three years.
Hold steady on your actions—continue to be compliant or be ready to act quickly. Experts agree that modification to the FLSA salary thresholds will come to fruition. As we’ve seen with this unexpected injunction, dates and rules can change abruptly. Extensis is advising clients to maintain their compliance measures.
We are monitoring the situation and will notify our partners immediately of any developments. We are tracking these developments daily, and will provide updates and recommended actions. In the meantime, if you have any questions or concerns, please contact the HRA Hotline at 877-773-8770, or send an email to employee@extensisgroup.com.

FLSA Background

The DOL issued final rules under the Fair Labor Standards Act (FLSA) that will substantially increase the minimum salary requirement for certain exempt employees effective December 1, 2016. This change will make an estimated 4.2 million additional workers eligible for overtime pay.

The overtime rule changes affect the classification of non-exempt and exempt employees.
Non-Exempt Employees Most hourly employees that receive overtime pay after 40 hours of work per week at 1.5 times their regular rate of pay.
Exempt Employees Salaried employees that are “exempt” from receiving overtime pay.
To qualify for “exempt” status, employees must satisfy the below three tests:
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Salary-Level Test Employers must pay employees a weekly salary that meets the FLSA minimum salary requirements.
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Salary-Basis Test Employers must pay employees their full salary in any week they perform work, regardless of quality or quantity of work.
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Duties Tests Employees’ primary job duties must meet certain criteria for executive, administrative, professional, computer, and outside sales exemptions.

Overtime Rule Changes

The primary change being made to the FLSA overtime rules is to test #1, the salary-level test. The salary-basis test and the duties tests are not changing at this time.
New Salary Requirements Starting December 1, regular employees with salaries between $23,660 and $47,476 will now be eligible for overtime pay.



In addition, non-discretionary bonuses, incentive payments, and commissions that are paid at least quarterly can now satisfy at least 10% of the minimum salary requirement for regular employees.

There is also a minimum salary requirement increase for highly compensated employees from $100,000 to $134,004 annually.

Future Increases Automatic updates to these minimum salary requirements will commence every three years beginning January 1, 2020, and notification will be provided 150 days before the effective date.

Implementing the Changes

The DOL has defined parameters for implementing the new salary requirements.
Changing Salaries As of December 1, exempt employees must be paid a salary of at least 90% of the minimum salary level each workweek—$821.70, or $42,728.40 annualized. This is based off of the 10% non-discretionary compensation.



At quarter end, any shortfall to the total $47,476 requirement must be made up by the employer in the first pay period of the next quarter.
Notifying Employees Certain state laws require that employees receive advance notice of seven to 14 days for changes in pay. However, some states mandate 30 days or more. It is suggested to provide as much time communicating these modifications as possible.

Options for Compliance

There are two options for employees who are currently exempt (not being paid overtime) and are not being paid the new minimum salary requirements.
Increase Salaries Increase employee salaries to meet the new requirement, provided the duties test is satisfied.
Reclassify Employees Reclassify employees as non-exempt and pay overtime for hours worked over 40 hours per week.
Important Considerations If an employee is earning a higher wage and often works overtime, then it might make sense to leave them at exempt status and raise their salary to the new minimum of $47,476, assuming their role is deemed exempt by the duties test (see below).

But for employees currently earning close to the current $23,660 minimum that rarely work overtime, it might make sense to reclassify them as non-exempt and pay overtime when it is incurred.
The Duties Tests While the DOL did not change the duties tests, they are another important component for determining the classification of employees since they define the job duties required to qualify for exempt status.

To be considered exempt, regular employees must pass the below Duties Tests and earn at least $913 per week on a salary basis, or $47,476 annually, as of December 1.

Highly compensated employees are exempt if they perform even one of the exempt duties of an executive, administrative, or professional employee outlined below.
Job Definitions for Duties Tests
Executive Employee:
  • Primary duty managing the enterprise, department or subdivision of the firm.
  • Directs the work of two or more employees or their equivalent.
  • Has authority to hire or fire and/or make recommendations that carry weight.
Creative Professional Employee:
  • Primary duty performing work requiring invention, originality or talent in a recognized field of artistic endeavor such as music, writing, acting and graphic arts.
  • Requires more than intelligence, diligence and accuracy; requires talent.
Administrative Employee:
  • Primary duty performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.
  • Exercises discretion and independent judgment with respect to matters of significance.
Computer Professional Employee:
  • Primary duty is application of system analysis techniques and procedures, including consulting with users to determine hardware, software or system specifications.
  • Design, development, documentation, analysis, creation, testing or medication of computer systems or programs including prototypes, based on and related to user or system design specifications.
Learned Professional Employee:
  • Primary duty performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized instruction.
  • Advanced knowledge was obtained by completing an academic course of study resulting in a four-year college degree or leading to certification.
Outside Sales Employee:
  • Primary duty is making outside sales.
  • Regularly works away from company’s place of business.
  • Sells tangible or intangible items, such as goods, insurance, stocks, bonds or real estate, or obtains order or contracts for services or the use of facilities.
Handling Reclassification Assess and analyze current employee state, ensure exempt employees are properly classified under the final rule, and handle any reclassifications that are necessary to remain compliant.

Cost of Non-Compliance

Misclassifying employees can be costly and time consuming. Although it is fact sensitive in terms of how the DOL or a court will assess damages against an employer that fails to comply with the FLSA, below is a general overview of what is typically at stake to the business:
Out of Pocket Costs
  • Back overtime compensation PLUS an equal amount as “liquidated damages”
  • Post-judgment interest
  • Civil penalties up to $1,100 per person
  • Plaintiff’s attorney’s fees/costs
  • Employer’s defense fees/costs
Legal Ramifications
  • A two-year limitations period; three years for willful violations
  • Future court-ordered compliance
  • Liability for management
  • Criminal penalties
Business Impact
  • Diversion of resources
  • Distraction of management and employees
  • Disruption to business operations
  • Adverse publicity
Preparing for a DOL Audit
  1. Compare overtime laws with firm’s processes and ensure compliance.
  2. Review job descriptions in question.
  3. Interview managers to ensure employee job descriptions are accurate.
  4. Determine employees’ job duties and review timekeeping records.
  5. Assess current exempt employee roles to identify amount of time allocated on all tasks performed.
  6. Confirm employees perform their jobs as assigned and work the hours designated by management.
  7. Check overtime records to ensure pay consistency and uncover discrepancies.

Resources

Below, you can find resources to help you better understand the FLSA changes and how they affect you.
FLSA Update A detailed look at the FLSA injunction.

Watch Now
FLSA Overtime Rule Changes Find out how Extensis can help get you compliant and stay compliant.
Download
FLSA 101: Fact Sheet Everything you need to know about FLSA Rule Changes
Download
FLSA Webinar A comprehensive walkthrough of the FLSA changes.
Download Presentation
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