The White Paper. I. Introduction and Background

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2 I. Introduction and Background On May 18, 2016, the U.S. Department of Labor ( DOL ) issued its final rule under the Fair Labor Standards Act ( FLSA ), amending and extending overtime pay eligibility to most employees earning less than $913 a week (or $47,476 a year) -- more than doubling the current standard. Additionally, many employees who earn in excess of $47,476 annually may be eligible for overtime unless they fit into one of DOL s categorical exemptions. Importantly, DOL did not change the duties tests for these exemptions. DOL also increased the minimum total annual compensation for highly compensated employees to $134,004. The effective date for DOL s changes is December 1, DOL s new rule resulted from a March 2014 memorandum from President Obama to the Secretary of Labor, directing DOL to update the threshold because regulations regarding exemptions for the [FLSA s] overtime requirement, particularly for executive, administrative, and professional employees have not kept up with our modern economy. As background, the FLSA became law in 1938, and it sets the federal minimum wage. The FLSA also guarantees overtime compensation at a rate of time and one half to most individuals who work in excess of 40 hours per week. However, Section 13(a)(1) of the FLSA carves out exemptions to the overtime pay requirement for individuals in certain administrative, professional, and executive ( EAP ) capacities who are paid a certain minimum salary or fee. Additionally, the FLSA exempts individuals who are employed as outside salespersons. In the executive summary of its final rule, DOL estimates that approximately 4.2 million currently exempt workers will become eligible for overtime compensation. Additionally, DOL estimates that compliance with its new rule will cost employers approximately $300 million per year. DOL s overtime rule has engendered significant controversy that will continue as employers become more familiar with the rule s substantial requirements. The issuance of the final rule was expedited by the Obama Administration to avoid a resolution of disapproval by the next Congress and President under the Congressional Review Act ( CRA ). The CRA gives Congress 60 legislative days to overturn regulations promulgated by executive branch agencies; however, President Obama is likely to veto a resolution of disapproval, so it would need widespread bipartisan support in order to override a presidential veto. Legal challenges are likely; however, none have been filed to date. The following walks through the key provisions and requirements of DOL s rule and offers suggestions to ILMA members to ensure compliance: II. Key Provisions (1) Effective December 1, 2016, the EAP salary exemption threshold increases from $455 a week (or $23,600 anually) to $913 a week (or $47,476 annually). (2) Up to ten percent (10%) of the EAP salary exemption threshold can be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. (3) The EAP salary exemption threshold will be automatically updated every three (3) years, beginning January 1, DOL estimates that the salary threshold will increase to $51,168 by DOL will post new salary levels 150 days in advance of their effective date, beginning August 1,

3 (4) DOL did not make any changes to its duties tests that determines whether salaried workers earning more than the EAP salary exemption threshold are ineligible for overtime pay. However, because of the higher salary threshold, DOL expects that more workers entitlement to overtime pay will be clearer solely from their salaries. Importantly for ILMA members, the rule retains the outside sales exemption for those employees whose job is primarily to travel off-site to sell the company s products. (5) By increasing the number of workers who are eligible for overtime when they work more than 40 hours per week, DOL believes it has given employers the choice to increase their employees salary to at least the new salary threshold, pay workers overtime for extra hours worked, or limit employees work to 40 hours in a week. (6) The highly compensated individual exemption will increase from $100,000 to $134,004, effective December 1, III. Basic Test to Determine if the EAP Exemption May Apply In order for an employee to be ineligible for overtime pay under the EAP exemption, three tests must be met. First, the individual must be paid on a salary basis or compensated with a set minimum fee. Second, the salary must meet or exceed the weekly ($913) or annual ($47,476) minimum threshold. Third, the employee must perform certain duties in the ordinary course of employment. If an employee does not fit into one of the carved out categories, then that employee is eligible for overtime pay for any additional hours worked beyond 40 hours in a week. The first question is whether the employee is compensated on a salary basis. In order to consider the remaining two elements under the EAP salary exemption, the employee must be paid a set salary or a specific amount of money on an annual basis. If so, then consideration is given to the salary threshold and the specific tasks or duties the employee performs. The second question concerns how much the employee is compensated. The new rule doubles the threshold for the EAP salary exemption for overtime. Effective December 1, 2016, the salary level is $913 per week or $47,476 annually for full-time employees. The salary levels are equal to the 40th percentile of earnings of full-time salaried workers in the lowest wage census region (the South). It is important to note that employers can factor in any nondiscretionary bonuses or commissions that are paid on at least a quarterly basis. These nondiscretionary amounts may be considered up to ten percent of the total $47,476 salary threshold. The third question is what specific functions the employee performs in the scope of his or her employment. There are separate duties tests for executive, administrative, outside sales, and professional employees that DOL did not revise from its 2004 rule. All of the applicable duties tests are outlined in further detail in the next section. IV. The Duties Test In order for an employee to be exempt from DOL s overtime pay requirements, his or her work responsibilities must align with one of DOL s exemptions. As a general rule, these categories are white collar jobs that involve managerial or office work. DOL expressly does not want blue collar or individuals primarily doing unskilled or manual labor to be exempt from overtime pay eligibility. Each specific test and its requirements is outlined below. 2

4 A. Executive Exemption To qualify for the executive employee exemption, all of the following elements must be met: The employee must be paid at a set rate of at least $913 per week ($47,476 annually); The employee s primary duty must be managerial in nature, specifically managing a particular department or sub-department of the business; The employee must customarily and regularly direct the work of at least two or more full-time employees or their equivalent; and, The individual must have hiring/firing authority 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. B. Administrative Exemption To qualify for the administrative employee exemption, all of the following elements must be met: The employee must be compensated on a salary or fee basis at a rate not less than $913 per week ($47,476 annually); The individual s primary duty must be office work (non-manual labor) that is related to general management or business operations; and, The employee s role must include the exercise of discretion and independent judgment with respect to matters of significance. C. Professional Exemption To qualify for the learned professional employee exemption, all of the following elements must be met: The individual employee must be paid on a set salary or fee basis of at least $913 per week ($47,476 annually); That specific employee s primary function and role within the company must be to perform work that necessitates superior advanced knowledge in the field of science and learning that is generally obtained through a prolonged course of specialized intellectual instruction ; and, That employee must perform work that requires exercise of independent judgment. However, the professional salary threshold is not applicable to any in-house lawyers that an ILMA member may employ. D. Highly Compensated Employees Exemption To qualify for the highly compensated employees exemption, the following elements must be met: That individual employee must perform office work (non-manual labor); The employee must be paid total annual compensation of $134,004 or more; That employee must be paid a minimum salary or fee of $913 per week ($47,476 annually); and, 3

5 The employee must customarily and regularly perform one of the duties of an exempt executive, administrative, or professional employee outlined in the tests above. The highly compensated employee exemption is a useful tool for employers; however, in reality if the employee is compensated at that high rate of pay he or she is likely to already meet one of the full EAP tests outlined above. E. Outside Sales Exemption To qualify for the outside sales exemption to the overtime compensation requirements, an employee must meet the following elements: The individual employee s primary role within the company must be to get orders for products or contracts for services; and, The employee must customarily and regularly be engaged away from the employer s place or places of business. It is important to note, that the outside sales exemption does not have a minimum salary threshold like the other categorical exemptions. As a result, the new minimum threshold of $47,476 is not applicable when doing an analysis under that exemption. ILMA members should review their payroll structure to determine if any employees are now eligible for overtime pay. Importantly, ILMA member should assume that employees making less than $47,476 annually are now likely eligible for overtime compensation under the new rule. However, if an ILMA member believes that one of its employees is exempt from the overtime compensation requirements through the EAP or outside sales exemptions, that member should walk through the DOL tests to ensure that the proper designation is made. It is important for ILMA members to classify properly each individual employee as willful or repeat violations of the overtime pay rules can result in DOL civil penalties of $1,100 per violation. Misclassified employees also can bring a private cause of action against the employer for back pay. Further, those private suits are eligible to have attorneys fees added to a successful case, which make them especially desirable for members of plaintiffs bar. V. Next Steps In order for ILMA members to further prepare for the new overtime rule by December 1, 2016, the following should be considered: (1) Review payroll logs to see which employees will be captured by the new salary jump and who will be converted to overtime-eligible under the new DOL rule. This will primarily involve employees who are currently compensated between $23,660 and $47,476. Those individuals are now likely eligible to receive overtime compensation of time and one half. ILMA members should start to closely monitor those employee s hours and track them for purposes of compliance with the rule by the December 1, 2016 deadline. Additionally, it may be advisable to begin to track those hours in advance of the deadline to ascertain why overtime hours were needed and to see if there is any ability to trim some hours to partially alleviate the financial impact. Part-time employees could potentially work some of those hours. 4

6 (2) In addition, it is advisable to review company benefit plans to see if any of the plans distinguish between exempt and non-exempt employees. If so, it may be desirable to adjust the benefit levels or eligibility rules in the plans. (3) DOL expects employers to consider whether to adjust employees salaries, particularly for those workers whose salaries are close to the new exemption threshold and who meet the duties test. Under the new rule, an employer is not prevented from reclassifying workers from a salary to an hourly basis, although the employee would still be eligible for overtime. It is advisable to consult with local counsel because applicable state laws may create administrative issues or complications. (4) It is not unreasonable to expect that exempt employees may be asked to shoulder a greater burden for after-hours or weekend work. However, under the duties test, an employer needs to be mindful not to load too many non-exempt tasks onto exempt employees. (5) ILMA is concerned with how the new DOL rule might affect company cultures among its membership, as it might be necessary for businesses to curtail or eliminate certain activities that might be compensable working hours for non-exempt employees, such as occasion travel to in-person meetings or adjusting shifts for non-exempt employees who might work on part of the weekends. Review workplace inefficiencies to determine if any employees are engaging in activities that ultimately are not needed and unnecessarily add additional hours to the workweek. (6) Employers should be conscious that the DOL s new overtime rule sets a floor and not a ceiling for overtime eligibility and exemptions. As a result, states are free to set more stringent requirements that could potentially go beyond what DOL has done at the federal level. ILMA members should review any applicable state laws or regulations. (7) The outside sales exemption is not bright line, and it has been subject to court interpretation. (8) Consult with your legal counsel about the proper designations and the proper managerial steps to take in order to properly classify all employees, including for outside sales, to comply with the new DOL rule. As outlined above, a misclassification can potentially be a very costly and cumbersome mistake. (9) Finally, communicate with and educate your employees about the change and that it results from new regulations and affects similarly-compensated workers across the country. * * * * * * * * Please contact Jeffrey Leiter (jleiter@bmalaw.net) or Daniel Bryant (dbryant@bmalaw.net) if you have any questions. 5