Fair Labor Standards Final Rule: The Overtime Law Change

The Fair Labor Standards Act (FLSA) governs the federal minimum wage and overtime policies, as well as ensures fair working conditions for employees. Most employers are governed by the FLSA because of wide scope of the coverage requirements. First, their must be an employer-employee relationship, which is determined by a number of factors set out by both state and federal case law.

Second, if there is an employer-employee relationship, then there are two types of coverage into which an employer may fall. Enterprise coverage is the first type of coverage, which exists if the business has two or more employees and an annual dollar volume of sales or business done of at lease $500,000. If the business does not meet that requirement, then there are specific types of businesses and entities that are automatically deemed to have enterprise coverage if there are more than two employees, which include hospitals, businesses providing medical or nursing care for residents, schools, or government agencies.

If the entity is determined to be an enterprise, then there is coverage under the FLSA for the entire company if the employer is engaged in interstate commerce, or working on goods or materials that have been moved in or produced in interstate commerce. Interstate commerce has been construed by the courts very liberally, which means that it is more likely than not that an employer is covered. Examples of activities that have been held to qualify as interstate commerce include using email for business purposes, USPS, crossing state lines for work, etc.

Even if an employer is not an enterprise by definition, individuals will be covered by the FLSA in each week that they are individually engaged in interstate commerce, produce goods for interstate commerce, or work in activities closely related and directly essential to production of goods for commerce.

If an employer or individual falls within the scope of the FLSA using the test(s) above, then all of its provisions apply. First, the employer must pay their employees the minimum wage. Both the federal minimum wage and the North Carolina minimum wage are $7.25/hour. A full time work week is 40 hours per week. Overtime pay is 1.5 times the employee’s regular hourly pay.

There are three main changes to the FLSA that take effect on December 1, 2016, and they are briefly explained below. For a more detailed explanation of the following changes and for additional changes and basic provisions of the FLSA, you should visit the Department of Labor’s website, which can be found below.

  1. Salary Level Test

Under the FLSA, employers that are covered by the FLSA will be required to pay overtime to any employee that is non-exempt. A non-exempt employee is one that does not qualify for one of the many exemptions, and so they are required to be paid overtime for any time worked beyond 40 hours per week. An employee is exempt from overtime pay if they meet one of the listed exemptions under the FLSA. There is a three part test to determine whether or not an employee is exempt, and all three parts must be met in order for the employee to be exempt, unless another exemption or exception applies under the FLSA. First, there is the salary basis test. Second is the duties test. Third is the salary level test, which is where the largest change is happening for the “White Collar” and “Highly Compensated Employees” exemption categories. The duties have not changed under these exemptions, but the salary amount levels have changed.

There are three main White Collar Exemptions: Administrative, Executive, and Professional. The duties test has not changed for any of these exemptions, and neither has the salary basis test. The salary level amount is the largest change that will be taking place. Currently, an employee under one of these exemptions must be paid $23,660 per year, or $415 per week to qualify as exempt under the White Collar Exemptions. On December 1, 2016, the amount will be increased to $47,476 per year, or $913 per week. This is a very dramatic increase that is going to affect millions of employees across the country.

Under the Highly Compensated Employees Exemption, the current salary level is $100,000. The new salary level test that takes effect on December 1, 2016 requires that the salary level be increased to $134,004and the employee must still be paid out at least $913 per week.

  1. Automatic Updates

To avoid such a dramatic increase again in the future, the Department of Labor has implemented a provision for automatic updates to take place every three years with respect to the White Collar Exemptions and the Highly Compensated Employees Exemption. For the White Collar Exemptions, the minimum salary requirement will be adjusted according to the 40th percentile of full-time salaried employees In the lowest wage region at the time. Under the Highly Compensated Employees Exemption, it will be adjusted according to the 90th percentile of full-time salaried employees nationally. The first adjustment is scheduled for January 1, 2020. The Department of Labor will publish a notice of updates at least 150 days before the new update goes into effect.

  1. Non-discretionary Compensation

The third change allows non-discretionary income to be used to satisfy up to 10% of the new salary requirements for the White Collar Exemptions. Non-discretionary income is income that is announced and/or promised in advance. This compensation must be paid at least quarterly, but there is an exception for one “catch up” payment. Examples of this can include certain bonuses, incentive payments, and commissions

These changes go into effect on December 1, 2016. For employers that are affected by these changes, you should do an audit of current employees to ensure that all employees are classified correctly. Make sure that you as the employer determine the appropriate steps for compliance, whether it be reclassifying the employee as non-exempt or raising the salary to meet the new minimum requirements if they would normally fall within the White Collar Employees Exemption or the Highly Compensated Employees Exemption.

For the full scope and explanation of the upcoming FLSA changes, and for a more detailed explanation of the FLSA, you should contact an attorney and visit the Department of Labor’s website at www.dol.gov.