Countdown to Compliance: DOL Limits Exemptions and Expands Overtime Eligibility

Transcription

1 Countdown to Compliance: DOL Limits Exemptions and Expands Overtime Eligibility Amy L. Hemenway, Esq. Benjamin E. Mudrick, Esq.

2 Overview May 23, 2016 U.S. Department of Labor published final rule revising the regulations for implementing the exemption from minimum wage and overtime for certain white collar executive, administrative, and professional employees. Final rule increases salary threshold required for exempt status, allows employers to count non discretionary bonuses and incentive payments toward the salary threshold in certain circumstances, and establishes procedure for automatic adjustments every three years. Final rule takes effect December 1, Between now and then, employers must make adjustments for employees whose pay falls below the new higher threshold, or whose primary duties are not consistent with exempt work.

3 Today s Agenda Background on FLSA coverage and overtime requirements Summary of white collar exemptions Description of key changes in Final Rule Salary level white collar, HCE Treatment of non discretionary bonuses Automatic updates What Now? Discussion of options for affected employees Examples

4 FLSA Overtime Rule Unless specifically exempted, employees covered by the FLSA must receive overtime pay for all hours worked in excess of 40 in a workweek at a rate not less than one and one half times their regular rates of pay. Overtime is intended to reduce the detrimental impact of overworking employees by incentivizing employers to hire and spread hours over more workers.

5 Question Are all employers covered by the FLSA? No, but the vast majority of employers and employees are. There are two types of coverage under the FLSA enterprise coverage and individual coverage. Caveat Even if an employer or employee is not covered by the FLSA, the New York State Labor Law s minimum wage and overtime requirements likely still apply.

6 Enterprise Coverage An enterprise is covered when it has annual sales or business of at least $500,000 in interstate commerce. Certain named enterprises are covered regardless of annual sales volume, including hospitals, schools and preschools, government agencies, and businesses providing medical or nursing care for residents.

7 Individual Coverage Individual employees may be covered even if their employer is not a covered enterprise if they engage in interstate commerce or in the production of goods for interstate commerce. Examples of covered activities: making out of state phone calls; receiving/sending interstate mail or electronic communications; ordering or receiving goods from an out ofstate vendor; handling credit card transactions or performing the accounting or bookkeeping for such activities.

8 Question What about non profit organizations? Are they covered? There are no automatic exclusions based on business type and there are no special rules for non profit organizations. However, as a general matter, non profit charitable organizations are not covered unless they engage in ordinary commercial activities for business purposes (e.g., running a gift shop). Even if a non profit organization doesn t satisfy the annual sales for enterprise coverage, individual employees may still be covered if they are engaged in interstate commerce activities.

9 Exemptions from Overtime To qualify for exemption, white collar employees generally must satisfy three tests: Salary Basis Paid a predetermined and fixed salary each week that is not adjusted because of variations in the quantity or quality of work performed; Salary Level Paid at least a minimum salary level set by regulation (employees can be paid more); and Primary Duty Job primarily involves performing executive, administrative, or professional duties, depending on the nature of the exemption. Exemptions are premised on the belief that exempt workers earn salaries well above the minimum wage, enjoy greater levels of benefits, and have better opportunities for advancement and job security.

10 Exempt Categories White Collar/EAP Executive, Professional, Administrative Highly Compensated Employee (HCE) Certain Computer Professionals (hourly) Certain Outside Sales Professionals

11 History of Exemptions Exemptions were first enacted in 1938 Amended eight times since, including 2016 amendment Changes in salary level Changes in duties tests Addition of exempt categories

12 History of Exemptions Year Executive (Long Test) Administrative (Long Test) Professional (Long Test) All (Short Test) All (Standard Test) 1938 $30 $30 N/A N/A 1940 $30 $50 $50 N/A 1949 $55 $75 $75 $ $80 $95 $95 $ $100 $100 $115 $ $125 $125 $140 $ $155 $155 $170 $ $ $913

13 Key Changes in Final Rule Increase in minimum salary level for executive, administrative, professional and salaried computer employees Limited use of non discretionary bonuses and commissions to satisfy minimum salary requirement Increase in salary for highly compensated employees Adoption of automatic minimum salary level increases December 1, 2016 effective date for (almost) all employers

14 Current Salary Level Threshold Federal threshold: $455 per week or $23,660 annually New York threshold: $675 per week or $35,100 annually DOL concerned that minimum wage is too close to the salary threshold, eroding the beliefs on which the exemptions were premised.

15 New Salary Level Threshold 40 th percentile of weekly earnings of full time salaried workers in the lowest wage Census Region $913 per week or $47,476 annually Based on 2015 Q4 BLS data for the South Census Region This is lower than the threshold in the proposed rule, but still a 101% increase for employers currently subject to the $455 minimum and a 35% increase for employers in New York subject to the $675 minimum. 40 th percentile nationally is $972, and the 40 th percentile in the highest earning wage Census Region (currently the West) is $1,050.

16 Non Discretionary Payments Count Employers can count non discretionary compensation such as bonuses, incentive payments, and commissions toward the minimum salary threshold. To count, such compensation must be paid at least quarterly and cannot exceed 10% of the salary threshold. Employers could not previously count these types of non discretionary bonuses toward the minimum salary needed to satisfy the threshold.

17 Non Discretionary Payments Count Minimum Total Salary Max Bonus (up to 10% of minimum) Remainder to Be Paid on Salary Basis Annual Quarterly Monthly Weekly $47, $11, $3, $ $4, $1, $ $91.30 $42, $10, $3, $821.70

18 Question What if the criteria for a non discretionary payment are not met? Do I have to make up the difference? Yes, employers must true up an employee s compensation no later than one week after the end of the quarter if the salary paid plus any non discretionary payment falls short of the minimum required threshold ($47,476 / 4 quarters = $11,869 per quarter). Example Suzie performs exempt work as an office manager for A Corp. Her annual salary is $45,500. She is eligible for a nondiscretionary bonus of up to $5,000, to be paid in equal installments of up to $1,250 per quarter, provided A Corp. meets its predetermined revenue targets. A Corp. pays 35% of the target bonus in Q2, 50% in Q3, and 100% in Q4. No bonus is paid in the first quarter because the eligibility criteria are not met.

19 First Quarter Second Quarter Third Quarter Fourth Quarter Minimum Salary ($47,476) $11,869 $11,869 $11,869 $11,869 Annual Salary ($45,500) $11,375 $11,375 $11,375 $11,375 Bonus Paid* $0 $ $625 $1,250 True Up Amount Owed $494 $56.50 $0 $0

20 Highly Compensated Employees Current Salary Threshold $100,000 annually New Salary Threshold 90 th percentile of earnings of full time salaried workers nationally Works out to $134,004 annually Based on 2015 Q4 data Must pay at least the weekly minimum salary otherwise required for white collar workers ($913) Cannot use non discretionary bonus or incentive compensation to cover this portion, but can use it to cover the difference between $47,476 and $134,000

21 Automatic Updates Final rule calls for updates to the salary thresholds every three years using the same methodology (40 th percentile for white collar; 90 th percentile for HCEs) First update will take effect January 1, 2020 DOL will publish the new thresholds on its website and in the Federal Register at least 150 days in advance Based on historic data, thresholds on January 1, 2020 would rise to $984 per week (or $51,168 annually) for white collar exemptions, and $147,524 for HCEs Prior versions of the rule did not contain a provision for automatic updates Proposed rule suggested an annual update based on the percentile methodology or rises in the CPU

22 Duties Test The Good News! Although the DOL requested comments concerning whether the duties test should change, the final rule retains the existing test without change. Although there are no changes to the duties test, this is a good time to review job descriptions versus actual duties to make sure that individuals classified as exempt are actually performing exempt work.

23 Question Are there any groups exempt from compliance with the final rule? DOL issued a time limited non enforcement policy for providers of Medicaid funded services for individuals with developmental or intellectual disabilities in residential homes and facilities with 15 or fewer beds DOL will not enforce the $913 per week salary threshold for this subset of employers until March 17, 2019 New York minimum salary will still apply ($675 per week)

24 Final Rule s Impact According to DOL The impact of the rule will depend, in large part, on how employers respond. Strengthens overtime protection for other workers, including those who may have satisfied the salary test but not the duties test, and therefore, were misclassified Reduces litigation Reduces uncertainty about future overtime and lack of pay Improved work life balance Better health Reduction in social assistance expenditures Employment spreading Macroeconomic benefits because workers may have more money to spend

25 WHAT NOW? (Immediate Steps To Take) 1. Review exempt positions with salaries below or near the $47,476 annual threshold Opportunity to review all exemptions even if salary is in excess of threshold 2. Determine course of action for each affected employee (see next slide) 3. Prepare communications strategy for affected employees, including new WTPAnotices 4. Ensure implementation on or prior to December 1, Establish method to track and implement future increases

26 Options for Employees Below New FLSA Threshold Option 1: Increase Salary Option 2: Convert to Non Exempt Hourly or Other Non Exempt Status (Commission, Piece Rate, Non Exempt Salary) Option 3: Consider Fixed Salary for Fluctuating Workweek NOTE: THIS IS NOT A CURE ALL REMEDY AND IS VIEWED SKEPTICALLY BY THE DEPARTMENT OF LABOR Option 4: Search for Another Exemption NOTE: THIS OPTION WILL BE LIMITED TO VERY SPECIFIC JOBS AND INDUSTRIES

27 OPTION 1: Increase Salary Most simple (but perhaps most costly) option Minimum Total Salary Max Bonus (up to 10%) Remainder to Be Paid on Salary Basis Annual Quarterly Monthly Weekly $47, $11, $3, $ $4, $1, $ $91.30 $42, $10, $3, $ Don t forget other requirements for white collar exemptions Payment on a salary basis Duties test Increasing the salary of an employee who does not meet the other tests will just increase your damages!

28 OPTION 2: Convert to Non Exempt (Hourly) Easiest option: track hours and pay on an hourly basis Hourly rate can be adjusted upward or downward on a prospective basis Remember minimum wage increases: Effective Date Upstate NYC with 11 or More Employees NYC with 10 or Fewer Employees Nassau, Suffolk and Westchester Counties 12/31/2016 $9.70 $11.00 per hour $10.50 $ /31/2017 $10.40 $13.00 per hour $12.00 $ /31/2018 $11.10 $15.00 per hour $13.50 $ /31/2019 $11.80 $15.00 per hour $15.00 $ /31/2020 $12.50 $15.00 per hour $15.00 $ /31/2021 TBD $15.00 per hour $15.00 $15.00 Also remember minimum wage orders for specific industries

29 OPTION 2: Convert to Non Exempt (Other) Non exempt employees can also be paid a weekly salary, or, in certain circumstances, a commission or piece rate OVERTIME STILL APPLIES Remember that overtime is based on REGULAR RATE not simply hourly rate May include other payments like bonuses and commissions Under FLSA, assumption is that all remuneration for employment paid to, or on behalf of, the employee is included in regular rate Specific exemptions set forth in Section 7(e) of the FLSA

30 Option 3: Fixed Salary for Fluctuating Workweek Adopting fixed salary for fluctuating workweek pay method for certain non exempt employees may save money PROCEED WITH CAUTION Method of pay for non exempt but only requires that hours in excess of 40 be paid at half time rather than time and a half 29 CFR : Where there is a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period, such a salary arrangement is permitted by the Act 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 he works is greatest, and if he receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one half his regular rate of pay.

31 Option 3: Fixed Salary for Fluctuating Workweek Example: Employer and non exempt employee will receive a base salary of $500 per week, regardless of the number of hours worked If employee works 20 hours, employee receives $500 Assuming no other payments, regular rate is $25.00 per hour If employee works 50 hours, employee receives $500 plus overtime at.5 times regular rate for 10 hours of overtime Assuming no other payments, regular rate is $10.00 per hour Accordingly, employee is entitled to an extra $5.00 for each overtime hour worked Total weekly payment of $ Note that OT rate changes based on number of hours worked higher overtime rate for fewer hours of overtime

32 Option 3: Fixed Salary for Fluctuating Workweek To use the fluctuating workweek method: 1. The employee s hours must actually fluctuate from week to week; 2. The employee must receive a fixed salary that does not vary with the number of hours worked during the week (excluding overtime premiums); 3. The fixed amount must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage; and 4. The employer and employee must share a clear mutual understanding that the employer will pay that fixed salary regardless of the number of hours worked.

33 Option 3: Fixed Salary for Fluctuating Workweek ISSUES TO CONSIDER BEFORE ADOPTING FLUCTUATING WORKWEEK DOL and courts are skeptical Employees hours must truly fluctuate (and many weeks should be below the 40 hour threshold) Pre determined/set schedules are often evidence against Payment of certain incentives or bonuses can undermine argument May be prohibited in some states TALK TO YOUR ATTORNEY!

34 Option 4: Other Exemptions There are other (limited) exemptions to overtime requirements under the FLSA for specific industries and occupations For example: certain outside salespeople, teachers, car salesmen, mechanics, partsmen, lawyers, doctors, employees of seasonal recreational and amusement facilities Caution: THESE ARE LIMITED AND MAY NOT BE ACCEPTED BY NEW YORK STATE LAW If you think any of these exemptions may apply, talk to your attorney first!

35 How Does This Work in the Real World??? EXAMPLE 1: We have 3 employees who are salaried exempt at the rate of $38,500 per year. They usually work 40 hours per week, but occasionally stay late to help finish projects. This amounts to 3 4 hours per month. We can t really afford to raise them to $47,476. What can we do? Keep them salaried and set a 40 hour per week expectation (or, even better, 37.5 hours) Convert to non exempt and pay overtime for any hours over 40 Extra cost = $27.76 per hour for overtime hours. For 3 employees at 4 hours per month = $ per year Limit overtime if possible Fluctuating workweek will likely not apply

36 How Does This Work in the Real World??? EXAMPLE 2: We have 4 employees who are salaried exempt. Their salary is $41,500 and they work on average 50 hours per week. What are our options? Increase salary to reach threshold = $23,904 for four employees Overtime hour = $29.93 (800 OT hours to justify increase to threshold) Limit overtime by shifting non essential work to other employees Hire part time employee Consider fluctuating workweek method (but may be difficult if employees regularly average 50 hours per week because no fluctuation)

37 How Does This Work in the Real World??? Keep salary but lower the number of expected hours and pay OT if employee works more than expected Expected Hours Hourly Rate Overtime Rate 40 Hours 45 Hours 50 Hours 40 $19.95 $29.92 $41,500 $49,279 $57, $16.80 $25.20 $34,944 $41,500 $48, $14.51 $21.76 $30,181 $35,837 $41,500

38 WHAT NOW? (Immediate Steps To Take) 1. Review exempt positions with salaries below or near the $47,476 annual threshold Opportunity to review all exemptions even if salary is in excess of threshold 2. Determine course of action for each affected employee 3. Prepare communications strategy for affected employees, including new WTPAnotices 4. Think about compression and impact on morale does this need to be addressed as well? 5. Ensure implementation on or prior to December 1, Establish method to track and implement future increases

39 QUESTIONS?