The U.S. Department of Labor announced in May its long-anticipated changes to overtime rules under the Fair Labor Standards Act (FLSA). For many of our clients in the security industry, this regulatory change will fundamentally alter how businesses approach pay and overtime for their employees.
Beginning Dec. 1, 2016, employees who are considered “salaried” and therefore exempt from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime requirements must earn a guaranteed minimum salary of at least $913/week ($47,476/year) in order to be treated as such. This new threshold is approximately double that of the current minimum salary requirement of $455/week ($23,660/year), which has been in effect for 12 years.
What does this mean for you?
Quite simply, if you have employees you are paying on a salaried, “exempt” basis who are earning less than $47,476 per year, you will either need to increase those salaries to the new minimum or reclassify those employees as “non-exempt,” track their time and pay them overtime for all hours worked in excess of 40 hours in a pay period. Note that some states have overtime provisions that require time-and-a-half pay for time in excess of eight hours within a single workday.
Established in 1938, the FLSA governs many foundations of employment law, including minimum wage, overtime, minimum age for workers, calculation of time worked, deductions from pay, and recordkeeping requirements. The terms “exempt” and “nonexempt” mean that an employee is either exempt or not exempt from the minimum wage and overtime provisions of the law.
There are three criteria to look at to determine who is eligible to be exempt from the minimum wage and overtime provisions of the FLSA:
1. Salary Test: To be considered exempt, in most cases an employee must be paid on a salary basis and must receive a guaranteed salary each week. That salary cannot be reduced based on quality or quantity of work; in fact, there are very few scenarios where an exempt employee’s salary can be docked.
2. Minimum Salary Test: Right now, an exempt employee must be paid at least $455/week ($23,660/year) — anything below that requires that the employee be designated non-exempt and thereby paid overtime for work exceeded 40 hours per week. Effective Dec. 1, 2016, the new salary minimum will be $913/week ($47,476/year).
3. Duties Test: While most recent news coverage has focused on the increase to the overtime pay provision, a properly classified exempt employee must also pass the duties test. Not only must an exempt employee be paid a minimum salary, they also must perform special duties that make them eligible for this exemption. These are what the Department of Labor calls the “White Collar Exemptions.” To qualify as exempt, an employee’s primary duties have to meet the standards in one of the following categories:
- Executive: Management of the organization or a customarily recognized department or division. This is true management — not usually a working supervisor — based on actual duties and level of bona fide, independent management authority, and not on job title alone.
- Administrative: High-level office or non-manual work directly related to management or general operations (such as accounting, IT, HR, marketing) and including the exercise of independent judgment and decision-making discretion on matters of significance.
- Professional: Work requiring advanced knowledge in science or other field of learning customarily obtained by a prolonged course of specialized intellectual instruction, i.e., higher education (not vocational education). In other words, much of the knowledge required is typically learned by going to college, not on-the-job.
- Computer: Design, development, creation, testing, and modification of computer systems and programs. This does not apply to help desk employees and roles involved in the manufacture, operation, repair, or maintenance of computers. Exempt computer professionals may, in lieu of passing the salary test, be paid by the hour if they make at least $27.63 per hour.
- Outside Sales: Making sales or obtaining orders or contracts, and work is largely performed away from the employer’s premises, i.e., cold-calling, identifying and visiting prospects, etc. Insides sales and customer service positions typically do not qualify. Bona fide outside sales professionals do not have to meet the salary test.
The vast majority of employees do not meet the criteria to be exempt under the duties test, and we find that many of our clients who are concerned about the increasing minimum salary have employees who would not qualify as exempt under the duties test in the first place.
Now is the perfect time for you to evaluate all of your exempt positions to make sure they qualify as exempt not only from a minimum salary perspective, but also from a duties perspective. Be forewarned, employee misclassification is a favorite focus of the Department of Labor, and penalties for misclassification are steep — including back pay with interest for up to three years, liquidated damages, and criminal penalties and imprisonment. For more information on the FLSA exemption requirements, visit www.dol.gov/whd/overtime/fs17a_overview.pdf
A final word of caution: many of our clients with misclassified employees feel they are unlikely to be audited and therefore do not worry about this lapse in compliance. Don’t make this mistake — you are only as safe as your last bad hire, and employees are just as aware of this overtime provision change as you are. Unfortunately, if a disgruntled employee feels he or she should have been eligible for overtime, you face an elevated risk that the DOL will come knocking.
Claudia St. John is President of Affinity HR Group and a Strategic Partner of the HRGroup, a provider of Human Resource support services, including hiring practices, compensation programs, talent development and more. For additional info, or to suggest a topic for a future article, email [email protected].
