After months of delay and speculation, the Department of Labor recently issued its final rulemaking with regard to what employees are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act. The new Rules do not alter the current minimum wage, but seek to increase the pool of employees who are required to receive the minimum wage and overtime pay. Current Rules require Employers to pay overtime to most employees who earn less than $455 per week, or $23,660 annually. The new Rules seek to increase the number of employees who must be paid overtime by more than doubling these current weekly and annual salary thresholds.
First, a brief primer on the Fair Labor Standards Act. The Act classifies employees as either exempt or non-exempt from its minimum wage and overtime provisions. The Act applies to both for-profit and non-profit Employers, and the new Rules affect both classes of Employers.
Some jobs, such as outside sales people, are exempt from the Act's reach. For the vast majority of workers, however, whether they are exempt or covered by the minimum wage and overtime provisions is determined by a three-part test:
- The Salary Level Test - The first test asks how much the employee is paid. If an employee is paid less than the amount set by law, he or she is non-exempt and must be paid the minimum wage and overtime, if the employee works more than 40 hours in a week. By more than doubling the weekly and annual salary thresholds below which employees must be paid at the overtime rate, the new Rules seek to enlarge the pool of workers entitled to overtime if they work more than 40 hours in a week.
- The Salary Basis Test - If the employee is paid the set amount or more, he or she is exempt from the minimum wage and overtime requirements, so long as the wage is in the form of a guaranteed salary, which is paid irrespective of the hours actually worked and the employee satisfies a Duties test.
- The Duties Test - The Duties Test exempts employees who perform certain Executive, Administrative or Professional duties. The Act also exempts certain Highly Compensated Employees, who also must satisfy a relaxed Duties Test. It is these last two categories of employees that the new Rules affect.
Here is a summary of the most important provisions of the new Rules:
- The new minimum weekly wage that must be paid to constitute an exempt employee has been raised to $913 per week, or $47,476 per year. These numbers are somewhat lower than what had initially been proposed. The numbers are pegged at the 40th percentile of full-time, salaried workers in the lowest census region, which is the South. As previously noted, employees paid at or above these rates must satisfy a Duties Test to be exempt from the minimum wage and overtime requirements.
- The new compensation level for Highly Compensated Employees is $134,000 per year, which is equal to the 90th percentile of full-time salaried workers nationwide. Highly Compensated workers still must meet the relaxed Duties Test to be exempt, but the final Rules do not make any change in the duties test for meeting the overtime exemptions.
- The Rules require automatic salary updating every three years to maintain the minimum compensation numbers at the stated percentiles.
- The salary base has been amended to permit Employers to use non-discretionary bonuses, incentive payments and commissions, to satisfy up to 10 percent of the new standard salary level, as well as a "catch-up" payment, so long as it does not exceed 10 percent of the new minimum salary. Highly Compensated Employees must receive at least the full standard salary each pay period without regard to non-discretionary bonus or incentive payments.
The stated purpose of the new Rules was to increase the size of the non-exempt workforce to make more workers eligible to receive overtime pay. However, there are methods by which employers can avoid the impact of the new Rules, and they should consult competent employment counsel if they wish to do so.
The Rules will take effect on December 1, 2016. This gives Employers ample time to audit their workforce and prepare to implement them. It is strongly suggested that they begin that process now.