FLSA’s new overtime pay regulations are set to have major organizational and ﬁnancial implications.
By Rosemarie Hill
A major change to the Fair Labor Standards Act, originally slated for December 1, 2016, has been put on hold – but don’t forget about it altogether. While a federal district court in Texas has issued a nationwide preliminary injunction prohibiting the Department of Labor from implementing its revised overtime rule, it does not mean that the DOL’s new overtime rule is invalid.
The ﬁnal rule was poised to double the salary level required for employees to be exempt from overtime under the FLSA, but a consolidated lawsuit originally
ﬁ led by the U.S. Chamber of Commerce and 21 separate states triggered an injunction. Judges generally do not issue such injunctions unless they think the underlying case has a substantial likelihood of succeeding, and this court admonished that the rule change “is contrary to the statutory text and Congress’s intent” and that “Congress, not the (DOL) should make (the) change.”
The injunction simply means that the change will not go into effect until the court determines the merit of the underlying case. It could be overruled, go into effect at
a later date, or be modiﬁ ed before implementation, so employers should still be familiar with and prepared for overtime changes.
The DOL last changed the act’s overtime threshold in 2004 to require employers to pay overtime to an employee unless the employee’s ﬁxed salary is at least $455 per week, or $23,660 per year, and the job qualiﬁes for a professional, administrative or executive “duties” exemption. The proposed threshold pay level will change to require employers to pay overtime to an employee unless the employee’s ﬁxed salary is at least $913 per week, or $47,476 per year. Employees who meet this new threshold still must qualify for an executive, administrative or professional “duties” exemption in order to remain exempt from overtime pay.
What Does It Mean to Be Exempt?
The majority of the workforce has heard the term exempt tossed around in the workplace, but what exactly does it mean? In short, if an employee is exempt, they are not entitled to overtime pay— they are exempt from overtime pay requirements. If an employee is non-exempt, they are entitled to overtime. The FLSA’s changes basically boil down to a redefinition of which employees are exempt and which are not. Under the new regulations, it is estimated that more than 4.2 million more workers will qualify for overtime—a staggering number for employers who are tasked with accommodating and managing this major pay scale change.
Who Qualifies as Exempt and Non-Exempt
Under the new regulation, salaried workers may be entitled to overtime pay, debunking the age-old myth that equates the term salaried with exempt. A salaried employee may well be exempt—many jobs that are exempt from overtime are salaried as opposed to hourly, and hourly workers are generally required to be paid overtime. But simply calling someone salaried or hourly is not the test. Paying someone an annual salary does not assure that they are exempt from overtime. All that matters in that determination is whether the job passes three tests: the salary basis, salary level, and duties tests.
The salary basis test. The predetermined fixed salary cannot be reduced except in limited circumstances. In other words, the amount of money an employer pays an individual must be fixed regardless of the number of hours worked. For instance, if an exempt employee works 20 or 60 hours in one week, the pay must be the same. It is a fixed salary.
Salary level or threshold. This must be at least $913 per week as of the compliance deadline.
Duties test. This is the most complex of the three tests and breaks down which of the three main white collar exemptions an employee may fall into— executive, administrative or professional— based on the principal or most important duty of an employee’s job.
An executive exemption occurs when an employee is paid on a fixed salary basis and has a minimum salary of $913 per week ($47,476 per year). The employee also has the the following primary duties:
• Oversees management of enterprise or customarily recognized department/subdivision, and
• Customarily and regularly directs two or more full-time equivalent employees, and
• Possesses the authority to hire and fire personnel or offer related recommendations that are given particular weight within the company.
An administrative exemption occurs when the employee is paid on a fixed salary basis and has a minimum salary of $913 per week ($47,476 per year). The employee also has the following primary duties:
• Conducts office or non-manual work directly related to the management or general business operations of an employer, and
• Exercises discretion and independent judgment with respect to matters of significance, examples of which include formulating, affecting, interpreting or implementing management policies or operating practices; or carrying out major assignments in conducting the operations of a business; or possessing the authority to commit the employer in matters of significant financial impact; or providing consultation or expert advice to management.
A professional exemption occurs when the employee is paid on a fixed salary basis and has a minimum salary of $913 per week ($47,476 per year). The employee also has the following duties fall within the following roles:
• Learned professional
• Creative professional
• Teaching professional
• Computer professional (different salary tests)
Professional exemptions in particular require the review of the employer’s industry or service area because there are special rules that apply to certain professions, for instance, to teachers, law enforcement professionals, first responders, and computer personnel.
In addition to the three main exemption classifications, there is also an exemption category for those employees who are considered highly compensated. Essentially, if an employee has a fixed annual salary of $134,004 (as of the compliance deadline), they may be exempt from overtime pay. Note that this dollar amount, as well as the new threshold amounts discussed above, may include commissions and non-discretionary bonuses to make up no more than 10 percent of the salary level, but board, lodging and other fringe benefits cannot be counted toward the threshold amount. Employees who qualify for this high compensation exemption from overtime pay must regularly perform one or more of the duties detailed above for an executive, administrative, or professional exemption, but not necessarily all of them as is required for non-highly compensated employees.
Other Exemption Factors
Even after an employee has been labeled exempt, an employer can destroy their exemption status simply through improper salary deductions. For exempted employees, employers are not permitted to dock pay except in a very few situations, which include:
• Full sick days
• Full personal days
• First and last week of employment
• Full weeks of no work
• Violation of written work rules
• FMLA leave
Additionally, employers must assure that job descriptions meet the actual job that is performed. The Department of Labor doesn’t care what a job description says or what an employee’s title is. It only cares what actual work is being performed.
Consequences of Misclassifications
Most legal issues relating to overtime are related to misclassification of employees as exempt from overtime pay. If the DOL initiates an investigation of whether a company has misclassified nonexempt employees as exempt, its investigators have the right to come into your offices and obtain documents going back three years. They also can demand to talk with employees and even do an on-site investigation and interview of your employees to determine if employees are properly receiving overtime.
During these so-called misclassification investigations, incomplete, or inefficient documentation of time worked may be uncovered. In other words, all non-exempt employees must be paid 1.5 times their regular rate of pay for every hour worked over 40 hours in a workweek. Employees must know what their workweek is, and employers must track time properly so they can determine if an employee is entitled to overtime, and what their regular rate of pay is in order to calculate the overtime amount.
In addition to DOL investigations, private misclassification lawsuits abound and are the fastest-rising area of employment litigation. To date, FLSA collective actions far outweigh any other kind of employment class action. And since 2009, the Wage and Hour Division of the DOL has closed more than 146,000 cases amounting to more than a billion dollars in back wages for upwards of 1.2 million employees.
If an employee has been misclassified as exempt from overtime, they can be awarded back pay for up to two years (three years if it is determined that the misclassification was willful). If the employer has not kept adequate time records, then the employee’s account of how much overtime they worked will generally prevail. It is crucial that employers keep good time records of nonexempt and exempt employees. Many employers don’t keep time records on exempt employees. If an exempt employee is suddenly targeted as one who should have been getting overtime for the last two or three years, and if no company records exist, the amount of overtime the company is assessed will often be whatever the employee says he/she worked. In addition, the FLSA allows this backpay amount to be doubled.
Employers are often targeted with collective actions: Lawsuits on behalf of not just one employee who has been misclassified as exempt, but a number of them. And perhaps most important in this litigation analysis is that any prevailing plaintiff in a FLSA action is awarded their attorney fees. So an employer will pay its attorneys, pay any backpay and liqudated double damages, and pay the employees’ attorney fees. No need to say how quickly that can add up.
Accompanying this heightened legislative focus is an increased level of federal enforcement that has been fueled by significant dollars from the current administration for DOL activities, including the hiring of numerous additional DOL investigators. The end result is an investigative force that is now able to conduct more actual on-site investigations than ever before. While investigators generally give employers advance notice prior to an on-site visit, they are under no obligation to do so. And no industry or size employer is being overlooked in the more aggressive enforcement, even nonprofits and religious organizations now find themselves under particularly aggressive scrutiny.
Actions to Prepare for the Coming FLSA Changes
With the DOL’s heightened scrutiny and the ever-present possibility of a legal misstep, it is vital business leaders take steps now to anticipate and identify potential problem areas. This is most effectively done by involving HR professionals, accounting departments, and attorneys who have an in-depth understanding of the intricate workings of the FLSA to fill in any knowledge gaps.
The large impact these changes will have on the workplace have engendered a number of legislative bills to either quash the changes or phase them in incrementally over a number of years. In addition, there are lawsuits challenging the changes as unconstitutional, including one by at least 22 attorneys general as well as the U.S. Chamber of Commerce. But organizations and HR need to be prepared.
Given that the federal injunction was issued so late, many employers have already informed affected employees of pay changes. These changes can certainly stay in place, or employers have the option to roll back their plans until the court reaches a final decision. The injunction may also have some unprepared employers breathing a sigh of relief. Businesses should make the most of the additional time to ensure that if and when the rule does move forward, it is a day of readiness rather than a day of reckoning.
Rosemarie Hill is a shareholder at Chambliss Law Firm in Chattanooga and also serves as the Section Chair for the Labor and Employment practice