The Fair Labor Standards Act (“FLSA”) is the federal law that establishes minimum wage and overtime pay requirements. Under the FLSA, employers must pay employees at least the federal minimum wage and overtime at a rate of at least one and one-half times the employee’s regular rate for any hours worked over 40 in a week. However, there have been several exemptions from the overtime requirement for employees who meet certain criteria.
The most common exemptions from the FLSA overtime requirement are the executive, administrative, and professional exemptions. These exceptions are commonly referred to as the “white collar” exemptions. In general, employees have qualified for these overtime exemptions if: (1) they are paid a fixed minimum salary for each workweek regardless of the number of hours they work of the quality or quantity of work they perform (commonly referred to as the “salary basis” test); and, (2) they perform specific executive, administrative or professional job duties outlined by the current regulations (commonly referred to as the “job duties” test). Many workers have been included within these exemptions, and lawsuits challenging exempt status and seeking unpaid overtime are very common.
Based in large part on these long-standing disputes, in March of 2014, President Obama directed the Secretary of the U.S. Department of Labor to prepare and propose new FLSA regulations to specifically address the rules for exemptions of certain employees from the FLSA overtime requirements. President Obama’s executive memorandum directing the introduction of new regulations made it clear that the regulation changes were intended to address the “white collar” exemptions. Since these exemptions are commonly applied by employers in a variety of industries, revisions to the regulations governing these exemptions will be significant for a very large number of employers.
Based on the directive from the President, the U.S. Labor Department recently proposed a substantial increase in the minimum salary amount required to meet the basic compensation criterion for the “white collar” exemption. The anticipated changes are likely to reduce the number of employees who qualify for exempt status. As a result, the cost of doing business for employers will increase. This is an important issue that business owners should be informed about and prepared to address. However, there appears to be some uncertainty as to how an employer should evaluate whether and to what extent this possible increase would affect employee compensation.
What happens next ?
Firstly, keep in mind, that the newly-proposed salary level will be irrelevant to some segments of the nation’s workforce.
Non-exempt employees who are paid on a salary-plus-overtime basis are not affected.
Others who will also remain unaffected include:
♦ Salespeople falling within the “outside salesman” exemption;
♦ Employees qualifying for the “teaching professional” exemption;
♦ Employees authorized to practice law who are actually practicing law;
♦ Employees authorized to practice medicine or any of its branches who are actually engaged in the relevant practice;
♦ Employees holding the degree required to practice medicine who are working in a medical internship or residency; and
♦ Employees whose work meets the computer-employee exemption requirements who are paid on an hourly basis at a rate of at least $27.63.
The above list does not include all employees who are exempt from the FLSA’s minimum-wage or overtime requirements and is merely used to highlight a few categories.
What should employers do?
Indications are that, due to Labor Department’s proposed automatic-“update” approach, $970 per week (annualizing to $50,440) would soon come to be the minimum. However, it is possible by the time the proposal actually takes effect, this figure or a higher one will control.
Employers must begin to consider longer-range planning and budgeting in order to be ready for the new minimum salary that will apply. Additionally, the Labor Department is also considering whether “nondiscretionary bonuses and incentive payments” should be credited to at least some extent in meeting the salary test.
Employers must be proactive and consider whether there are alternative ways to pay in order to comply with the FLSA’s minimum-wage and overtime requirements at levels that are financially palatable. Some options that have been discussed include commission-based plans; day-rate, job-rate, or shift-rate payments; and a variety of other approaches.