flsa exemption changes effective december 1, 2016 -...

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FLSA Exemption Changes Effective December 1, 2016

Kara M. Craig Staff Counsel


Agenda

• Background of FLSA • Overview of Proposed

and Final Rule • Impact • Action Plan • FAQs


Some background first….

• What is the FLSA? – The Fair Labor Standards Act – Enacted in 1938

• What does the FLSA cover? – Minimum wage – Overtime – The employment of minors

• Who is it governed by? – U.S. Department of Labor, Wage and Hour Division

Note: WA, OR, ID also have Wage Act; employees are entitled to law most favorable


Overtime

• Non-exempt – an employee who is entitled to time and one half regular rate of pay for hours worked in excess of 40 in work week


Computing Overtime

• Non-discretionary bonuses must be included in the regular rate of pay for purposes of calculating overtime

• Shift differential pay is included in regular rate of pay for overtime purposes

• Washington, Oregon, and Idaho follow the FLSA regarding regular rate of pay for overtime


Exempt Status

• Exempt – employees who fall within specific categories defined by FLSA and/or state law who are not subject to the overtime requirement – Most common exemptions are called “white collar” – Presumption of non-exempt unless employee fits

specifically within an exemption – Must meet 3 requirements:

1. Meet minimum salary threshold; 2. Paid on a salary basis; and 3. Must perform exempt duties


Exempt Employee Salary Basis

Salary basis means: • Currently, an exempt employee must be compensated

on a salary basis at a rate of not less than $455 a week, $23,659.92 a year

• Employee regularly receives each pay period, a predetermined amount constituting all or part of the employee’s compensation

• Not subject to reduction because of quality or quantity of work performed

• General rule is an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked


Exempt Employee Duties

• Assuming the employee meets the salary basis and amount test discussed previously, the employee must also perform specific duties for each statutory exemption

• The employee’s actual duties and qualifications determine the employee’s status, not the particular title: – Calling an employee a “manager” will not guarantee that

employee’s exempt status – Placing an employee on salary and classifying the

employee as exempt without regard to duties or percentage of time spent in exempt duties


Types of Exemptions

• Executive • Professional • Administrative • Outside Sales • Computer Professionals • Highly Compensation Employee


Executive

• Compensated on a salary basis at a rate of not less than $455 per week.

• Primary duty is management of the enterprise or department.

• Regularly and customarily oversees two or more employees.

• Authority to hire or fire, or make recommendations of “particular weight”.


Professional

• Compensated on a salary or fee basis at a rate of not less than $455 per week.

• Primary duty is the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized instruction “Learned Professional” – law, medicine, accounting, engineering or;

• Whose primary duty is work that requires invention, imagination, talent, “Creative Professional”- actors, musicians, writers.

• Work requires consistent exercise of discretion and judgment.


Administrative

• Compensated on a salary basis at a rate of not less than $455 per week.

• Primary duty is office or non-manual work directly related to the management or business operations.

• Regularly exercises discretion and independent judgment regarding “matters of significance”.

• Often referred to as the “catch all” exemption.


Outside Sales

• Not subject to the minimum salary level requirement. • Must be employed for the purpose of making sales or

obtaining orders or contracts for services. • Must be customarily and regularly engaged away from

the employer's place of business. • Cannot exceed 20 percent of all work hours in

activities not described above, unless such work is “incidental to and in conjunction with” sales or solicitation.


Computer Professional

• Application of systems analysis techniques and procedures;

• Design of computer systems based on and related to user specifications;

• Creation or modification of computer programs based on and related to machine operating systems; or

• A combination of the above duties. • The employee’s regular rate of pay must be at least

$27.63 per hour.


Highly Compensated Employee

Individuals who earn at least $100,000, and customarily and regularly perform any kind of exempt duty or responsibility. • Not available in Washington State.


Retail Commissioned Employees

• Certain retail employees who earn at least 50 percent of their compensation from commissions and make at least one and one-half times minimum wage for all hours worked are exempt from overtime payments.

• There are similar provisions for wholesale commissioned employees and for commissioned employees of auto dealerships.


Executive Order March 2015


FLSA Proposed Overtime Rules

• July 6, 2015, DOL issued proposed rule that would amend white collar overtime exemptions by increasing minimum salary amounts

• The Proposed Rule sets the standard 2016 salary level at $970 per week, or $50,440 annually

• Automatic annual adjustments based on inflation • Duties Test remains same but DOL solicited comments

on possible changes • Estimated 5 million white collar workers

impacted


FLSA FINAL RULE

• On May 23, 2016, the DOL published the Final Rule amending white collar overtime exemptions by increasing minimum salary amounts

• The Final Rule sets the minimum salary level at $913 per week, or $47,476 annually

• Automatic three-year adjustments based on inflation • Duties Test remains same • Effective December 1, 2016 • Estimated 4.2 million white collar workers impacted


FLSA FINAL RULE

• In 1975, 62% of workers were overtime eligible • Now 7% of workers are non-exempt • $46,476 represents the earnings of the 40th percentile

of salaried workers in the South, the lowest-income region

• 12.5 million workers will benefit from the new rules – more than half of them women, and a disproportionate share of them African-American and Hispanic.

• Biggest effects will be felt in the South where a large share of workers are carved out


Minimum Salary Threshold “One Size Fits All”

• Regions with low cost of living held to same rule • Impact on workers in certain states and rural areas

could bring 45% of full time salaried workers under exemption – $55,000 annual salary in D.C. = $35,000 in W. VA – $75,000 annual salary in SF = $47,500 in Fresno, CA*

*CNN Money’s Cost of Living Calculator


Minimum Salary Threshold

• Non-profits, state and local governments, small businesses

• Absurd possibility of non-exempt executives • Average Salary for non-profit:

– CEO $59,510 – CFO $40,000 – COO $41,813


Treatment of Bonuses and Incentive Payments

• Previously DOL has assessed compliance with the salary level test by only looking at actual salary or fee payments made to the employee and has “not included bonus payments of any kind” in this calculation.

• DOL now recognizes “increased role bonuses play in many compensation systems” and need to modernize the overtime regulations.

• New Rule permits non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the weekly salary level test, provided these forms of compensation are paid at least quarterly.


Treatment of Bonuses and Incentive Payments

• New Rule does not alter the exclusion of board, lodging, or other facilities from the salary calculation.

• New Rule does not expand the salary level test to include: • Discretionary bonuses; • Payments for medical, disability or life insurance; • Contributions to retirements plans; or • Other fringe benefits.


Three- year Salary Adjustment

• Increases predicted to be a “death spiral” for exempt status

• 40th percentile of salaried workers will keep growing – net result of rendering more exempt employees

• Regular “pot stirring” of classification issue – employer forced to increase salaries and/or reclassify to non-exempt annually

• Nothing in rule about adjusting the level DOWN, only up


Three-year Salary Adjustment

• Flattening compensation structures

• Constricting performance increases

• Forcing employers into “check the box” increases based on the law not actual performance

• More jobs sent overseas?


Impact

• Lower exempt incentive pay and benefits

• Restructure of business models

• Less managers and more part time employees

• Less flexibility for work schedules

• Morale


Impact

• Concept of “Banker’s hours” is outdated

• Exempt employees work out side business hours either to make up for productivity loss during the day and/or to be ambitious

• Reclassification to non-exempt perceived as a demotion

• Employer must respond to “off the clock work”


Employer Action Audit

• Review job descriptions for employees currently classified as exempt

• Identify EAP employees who will not meet the new Salary Level ($913/wk) requirement and thus, must be reclassified as non-exempt when the Final Rule is implemented

• For EAP employees, who will meet the new salary level requirement, confirm that their positions squarely meet the applicable duties tests to maintain compliance with the law


Employer Action Legal Risks

• Employees converted to non-exempt status who were improperly classified as exempt may be entitled to back wages (including overtime) if they: 1) were not paid at least minimum wage for all hours

worked; 2) were not paid overtime for hours worked over 40 in a

workweek; or 3) were not given the required rest breaks and meal periods

pursuant to State law. • Employees have a right to right to report a suspected

wage and hour violation to the DOL, who will investigate the claim

• Reporting a wage and hour violation is a protected activity and employees are protected from retaliation for doing so



• Employees have a right to right to report a suspected wage and hour violation to the DOL, who will investigate the claim

• Reporting a wage and hour violation is a protected activity and employees are protected from retaliation for doing so



• If you discover employees were not classified correctly before the new rule consult with attorney regarding appropriate process for reclassification

• Back wages? • Overtime may not be waived in settlement without

Court or DOL approval • Notice of violation exposes employer to liquidated

damages • SOL is 3 years


Employer Action Policy Update

• Review handbooks and written policies that distinguish between exempt and non-exempt employees when granting fringe benefits like PTO etc., and be prepared to address the loss of any fringe benefits if an employee is reclassified to non-exempt

• Off the clock policy see sample • Policy for limiting overtime that contains:

– Employees need authorization for OT – Must record time – Working OT without authorization results in discipline – Discipline but pay employees who work unauthorized OT


Employer Action

• Communicate early any decisions to reclassify employees due to new rule

• Include Management • Work on “script” and be consistent


FAQ

What if I have a salaried exempt professional who earns over $60K a year, but is working part time so I am only paying her $30K a year? Can she still be exempt?


Answer

• No. Not under Final Rule. • Under current rules part time employee would still be

exempt assuming she meets duties test. • Employers can pay EAPs working part-time or job-

sharing a salary less than the Salary Level and will not violate the FLSA so long as the salary meets the minimum wage requirements for all hours worked and the employee does not work more than 40 hours in a workweek.


FAQ

Can fringe benefits be different for non-exempt and exempt employees?


Answer

Yes, so long as your policies do not have the intent or effect of discriminating against employees based on their membership in a protected category. Employers should think long-term about compliance with the new rule and avoid “grandfathering” employees whose classifications, and thus benefits, change pursuant to the new salary test. You may inadvertently create a new subcategory of employees classified as non-exempt, but receiving benefits intended for exempt employees.


FAQ

Can I pay a non-exempt employee on a salary basis?


Answer

Yes, but you must ensure that the non-exempt employee receives at least minimum wage for all hours worked, and overtime for all hours worked over 40 in a work week. Therefore, you must still keep time records for the employee to avoid a violation. Furthermore, state law may require breaks and meal periods for non-exempt employees.


FAQ

If I reclassify an employee to non-exempt can I reduce their pay?


Answer

• Yes, but seek legal advice and counsel to assess the potential consequences – both legal and practical.

• Reducing the hourly wage of an employee who was formerly classified as exempt may inspire the employee (or employees) to make a claim: 1) for back wages based on misclassification, 2) discrimination, or 3) retaliation, if he or she complained about pay previously.


FAQ

Does the FLSA’s “Highly Compensated Employee” (HCE) exemption apply in Washington, Oregon, and Idaho?


Answer

• The HCE exemption does not apply in Washington and Oregon. Idaho law provides that an “exempt employee” is defined by federal law.

• Under Final Rule HCE exemption will go from $100,000 to $134,004 in 2016.

• Based on annualized weekly earnings of the 90th percentile of full-time salaried workers based on fourth quarter of 2015 data.


FAQ

Is there a small business exemption or non-profit from the FLSA or the Department's proposed overtime rule for white collar workers?


Answer

• To establish that an employer is subject to the requirements of the FLSA, an employee must show that there is 1. enterprise coverage; or 2. individual coverage.

• Enterprise coverage: Annual dollar volume of sales or business done of at least $500,000.

• Individual coverage: Employee must “directly participate in the actual movement of persons or things in interstate commerce.”


Answer

Employees of certain businesses are covered by the FLSA regardless of the amount of gross volume of sales or business done. These businesses include: hospitals, businesses providing medical or nursing care for residents; schools (whether operated for profit or not for profit); and public agencies.


Get Ready!


Contact Information:

Kara M. Craig

[email protected] | 206.664.7258

mailto:[email protected]

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