What Does New Rule on Minimum Salary Rate Mean to Your Business? Edward E. Hollis Daniel G. Prokott Stacey L. Smiricky

Transcription

1 What Does New Rule on Minimum Salary Rate Mean to Your Business? Edward E. Hollis Daniel G. Prokott Stacey L. Smiricky

2 What We ll Cover FLSA Overview Damages Administrative, Executive, Professional and Computer Employee Exemptions Highly Compensated Employee Exemption Overtime Pay Requirements The New Rule on Minimum Salary Rate The Impact of the New Rule What Should Employers Do?

3 FLSA Overview The FLSA generally requires employers to pay non-exempt employees at least the minimum wage (currently $7.25 per hour) for all hours worked, overtime compensation for all hours worked over 40 per workweek for non-exempt employees, and to accurately track the number of hours that non-exempt employees work Employees are presumed by law to be non-exempt, and the burden to prove an employee is exempt falls on the employer To be exempt, an employee must satisfy all the requirements of at least one exemption Common exemptions for employees include the administrative, executive and professional exemptions

4 Damages Under the FLSA, a plaintiff may recover back pay, liquidated damages (in an amount equal to the amount of back pay), attorneys fees, and litigation costs The statute of limitations is two years for ordinary violations and three years for willful violations Simply paying a salary, or a salary plus extra compensation for working extra hours, does not eliminate the obligation to track hours worked and pay overtime compensation for all hours worked over 40 per workweek The employer must calculate the employee s regular rate of pay and pay the employee 1.5 times the regular rate for each overtime hour

5 Administrative Exemption The administrative exemption has the following requirements: The employee must receive at least $455 per week on a salary or fee basis; Special exception for certain academic advisors in educational institutions paid a salary that is at least equal to the entrance salary for teachers in the same educational establishment The employee s primary duty must be the performance of office or nonmanual work directly related to management or general business operations; and The employee s primary duty must require the use of discretion and independent judgment with respect to matters of significance.

6 Executive Exemption The executive exemption has the following requirements: The employee must receive at least $455 per week on a salary or fee basis; The employee s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and The employee must have the authority to hire or fire other employees, or the employee s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

7 Professional Exemption The professional exemption has the following requirements: The employee must receive at least $455 per week on a salary or fee basis; The minimum salary requirement does not apply to doctors, lawyers or teachers The employee s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; The advanced knowledge must be in a field of science or learning; and The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

8 Computer Employee Exemption The computer employee exemption has the following requirements: The employee must be compensated either on a salary or fee basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 per hour; The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;

9 Computer Employee Exemption (Cont.) The employee s primary duty must consist of: The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or A combination of the aforementioned duties, the performance of which requires the same level of skills.

10 Computer Employee Exemption (Cont d) The computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment Employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs (e.g., engineers, drafters and others skilled in computer-aided design software) but who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations identified in the primary duties test described above, are also not exempt under the computer employee exemption

11 Highly Compensated Employee Exemption The highly compensated employee exemption has the following requirements: The employee must be paid total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis; The required total annual compensation of $100,000 or more may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits The employee s primary duty includes performing office or non-manual work; and The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

12 Overview of Overtime Pay Requirements Unless specifically exempted, an employee covered by the FLSA must receive overtime compensation for hours worked in excess of 40 in a workweek at a rate (with very limited exception) not less than 1.5 times the employee s regular rate for that workweek The regular rate cannot be less than the minimum wage An employee s regular rate includes all pay for work except certain payments that may be excluded, such as premium payments for work on Saturdays, Sundays and holidays, vacation or sick pay, and purely discretionary bonuses An employee s workweek is a fixed and regularly recurring period of 168 hours 7 consecutive 24-hour periods

13 New Minimum Salary Rule: DOL s Initial Proposal March 2014: President Obama signed an executive order directing the DOL to revise its rules July 6, 2015: DOL issues proposed regulations Increase the minimum salary from $455 per week ($23,660 per year) to $970 per week ($50,440 per year) Increase the minimum total annual compensation amount for highly compensated employees from $100,000 to $122, day comment period More than 270,000 comments

14 The Final New Minimum Salary Rule Issued May 18, 2016 Effective December 1, 2016 Includes hundreds of pages of commentary Increases the minimum salary from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) 40th percentile of full-time salaries in the lowest-wage Census region (the South) Increases the minimum total annual compensation amount for highly compensated employees from $100,000 to $134,004, which includes at least $913 per week paid on a salary basis Minimum salary amounts will increase every three years, beginning January 1, 2020 Up to 10% of the minimum salary amount can be satisfied by payment of nondiscretionary bonuses or incentive payments on a quarterly or more frequent basis

15 Non-discretionary Bonuses or Incentive Payments Up to 10% of the minimum salary amount can be satisfied by payment of non-discretionary bonuses Promised bonuses such as those announced to employees to induce them to work more efficiently or to remain with the employer are considered non-discretionary DOL s comments cite 29 CFR (c) Bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay. Attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee s continuing in employment until the time the payment is to be made and the like are in this category.

16 Non-discretionary Bonuses or Incentive Payments If an exempt employee does not earn enough in non-discretionary bonuses or incentive payments in a quarter, then the employer has one pay period to make a catch-up payment at the end of the quarter or the employee becomes eligible for overtime for that quarter No catch-up payments are permitted under the highly compensation employee exemption

17 The Final New Minimum Salary Rule (Cont d) No changes to any of the duties tests No adoption of a 50% rule (like the requirement under California law) No changes to the outsides sales employee exemption Note that for computer exemption the new rule will not affect employees who are paid by the hour at $27.63 per hour or more, but will affect exempt computer employees paid on a salary basis who will be subject to the new $913 per week salary minimum

18 Other Key Issues No proration for part-time employees Non-profit organizations are not exempt from the minimum salary Understanding all of the implications of reclassification to non-exempt Off-the-clock work On-call time Travel time Telecommuting Meal and rest breaks Time recording

19 What Should Employers Do? Analyze positions classified as exempt for accuracy Review job descriptions, and update as needed Identify current exempt positions that pay less than the new minimum weekly salary and decide what to do Develop a communication and implementation plan Determine whether any policies should be revised Train managers who do not have experience managing non-exempt employees and overtime issues (e.g., off-the-clock, on-call, travel and telecommuting time) Train newly classified non-exempt employees with respect to time recording, taking meal and rest breaks, etc.

20 What Should Employers Do? Several options Increase the employee s salary to meet or exceed the new minimum Reclassify the employee as non-exempt and continue to pay the employee on a salary basis Understand overtime pay obligations Reduce hours to eliminate overtime pay exposure Fluctuating workweek/half-time plan" option of salaried non-exempt to save on overtime, provided certain criteria are met Reclassify the employee as non-exempt and start paying hourly wages plus overtime Many resources on the DOL s website:

21 Fixed Salary For Fixed Number of Hours An employer may pay a weekly salary to a non-exempt employee based on an expected number of hours in a typical workweek, but also must pay overtime wages if the employee works more than 40 hours in any workweek. See 29 C.F.R Example: A non-exempt employee is paid a base salary of $ based on the understanding that his or her work hours will typically be 36 hours in a workweek. The employee s regular rate of pay is $720 divided by 36 hours, or $20 per hour, and when the employee works overtime the employee is entitled to receive $20 for each of the first 40 hours (including hours 37-40) and $30 (one and one-half times $20) for each hour thereafter.

22 Fixed Salary For Fluctuating Hours An employer may pay a weekly salary for all hours worked to a non-exempt employee who works fluctuating hours from week to week, but must also pay overtime compensation if the employee works more than 40 hours in any workweek. See 29 C.F.R Example: A non-exempt employee is paid a base weekly salary of $720 based on the understanding that his or her work hours will vary from week to week, but never exceed 50 hours in a workweek. If one week the employee works 40 hours, the employee s regular rate of pay for that week is $18 ($720/40). No overtime is due and the employee is paid only the base salary of $720. The next week the employee works only 38 hours, receiving the same base salary of $720. The next week the employee works 48 hours. The regular rate of pay that week is $15 ($720/48). The employee is paid the $720 base salary, plus eight hours of overtime at a halftime rate of $7.50 per hour, for total weekly compensation of $780 ($720 salary plus $60 overtime premium). Because the employee has already received straight-time compensation on a salary basis for all hours worked, only additional half-time overtime pay is due.

23 Fixed Salary For Fluctuating Hours (Cont d) This type of fluctuating work week payment structure can only be used if the employee s hours worked vary from week to week and must be pursuant to a clear mutual understanding between the employer and employee, and therefore should be in a written document explaining the method and signed by the employee. In addition, this system is permitted under the FLSA only if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours the employee works is greatest. Because the salary is intended to compensate the employee for whatever hours are worked in the workweek, the regular rate of the employee will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable regular rate for the week. Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate under the salary arrangement.

24 Fixed Salary For Fluctuating Hours (Cont d) The fluctuating workweek method requires that the employee be paid a fixed salary, and therefore payment of non-discretionary bonuses tied to work hours or performance metrics (i.e., payment of additional amounts that should be included in an employee s regular rate calculation) may invalidate the fluctuating workweek method because the employee is not actually paid a fixed salary when the bonuses are factored in and therefore the fixed salary requirement is not met. Under the FLSA, pay periods may be weekly, bi-weekly, semi-monthly or monthly, but work hours for purposes of determining overtime pay must be computed on a weekly basis. Therefore, it is permissible to pay a non-exempt employee a monthly salary based on the fluctuating workweek method and to also pay the employee his or her overtime compensation on a monthly basis, but any additional overtime pay that is due must be determined based on the actual hours worked on a weekly basis. Some state laws require more frequent wage payment. For instance, the Indiana Wage Payment Statute requires that employees, upon request, be paid at least semi-monthly or biweekly.

25 Key Takeaways The new minimum salary rule $913 per week becomes effective December 1, 2016 The minimum total annual compensation amount for highly compensated employees is also increasing (from $100,000 to $134,004) Paying up to 10% in non-discretionary bonuses to satisfy the new minimum salary may be helpful, but employers must be careful The new rule does not change any of the duties tests Analyze exempt positions and confirm they satisfy both the duties and new minimum salary requirements Consider the options and make decisions well before December 1, 2016 Develop a communication and implementation plan for any positions that will be reclassified as non-exempt Develop appropriate training for managers

26 Questions Edward E. Hollis Partner Indianapolis Daniel G. Prokott Partner Minneapolis Stacey L. Smiricky Partner Chicago