In a follow up to our recent
post, the US Department of Labor (DOL) has now issued its final rule regarding the
salary thresholds for exempt status. The final rule will go into effect on
January 1, 2020 and establishes the following rules:
Salary exempt employees must earn at least $684/week (equivalent to $35,568 per year for a full-year worker) (which is slightly more than was proposed in March 2019 due to inflation/updated data but less than was proposed during the Obama Era);
Employers can use non-discretionary bonuses and incentive payments that are paid at least annually to satisfy up to 10% of the salary basis for the white collar exemptions (if this is utilized the minimum salary paid can be no less than $615.60/week) (however, it should be noted that (1) if the employee does not earn the bonus the employer will need to pay the amount anyway no later than one week from the end of the 52 week period or the salary basis will not be met and (2) if the employee leaves employment before the bonus is paid/earned the employer will have to pay the pro-rata share of the bonus at termination to ensure the minimum salary threshold was met);
In order to qualify for the “highly compensated exemption” employees must earn at least $107,432/year (formerly $100,000/year) and must be paid at least $684/week (however, Illinois employers should note this is not applicable in Illinois because Illinois did not adopt the highly compensated exemption); and
Revises the special salary level for the motion picture industry and US territories.
We anticipate the new rule will receive legal challenge. However, litigation is unpredictable, so employers should begin preparing now to ensure they are ready for January 1, 2020.
Under the Fair Labor Standards Act (FLSA), employees must be
properly classified as either exempt or nonexempt, and nonexempt employees must
be paid overtime (1½ times their regular rate of pay for all hours worked over
40 hours in a workweek). All compensation, including commissions and non-discretionary
bonuses, must be included in the regular rate of pay for purposes of
calculating overtime, unless the compensation is one of eight specified types
of payment (e.g., holiday gift, birthday gift, discretionary bonus, and
certain profit sharing payments).
Employees may be classified as exempt if they satisfy one of
the specified statutory exemptions, the most common of which are the
administrative, executive, and professional exemptions. To satisfy these
exemptions, an employee has to meet both a salary basis test (be paid at least
the minimum required amount of salary each workweek)and job duties test
(have certain job responsibilities).
The title of the position is not relevant. The work that the
employee is actually performing on a daily basis is the main inquiry.
Two of the most common mistakes made by employers involve
misclassification of employees (exempt versus nonexempt) or improper
calculation of overtime (did not include all hours worked and/or did not use
the correct regular rate of pay). Lawsuits under the FLSA, involving
these types of mistakes, have been on the rise the past few years.
Earlier this year, an Indiana automotive service business
agreed to pay over $1 million in overtime back wages and liquidated damages
after an audit by the Wage and Hour Division (WHD) of the U.S. Department
of Labor found that the company failed to include bonuses, commissions,
incentive pay and shift differentials in the regular rate of pay overtime
On July 1, the WHD issued an opinion letter on the proper
calculation of overtime for non-discretionary bonuses (quarterly and annual). A
non-discretionary bonus paid, based on the number of straight time hours
worked, required the employer to recalculate the regular rate of pay for any
period the bonus covered and pay additional overtime. A quarterly bonus paid as
a percentage of straight and overtime compensation did not require
recalculation of overtime, because the bonus necessarily included all overtime
as a matter of arithmetic.
FLSA lawsuits have been on the rise, in part, because
employers face “strict liability” for violations, meaning no defense for honest
or unintentional mistakes. Good faith can be a defense to avoid certain
penalties, such as liquidated damages, but it is not a defense to the
underlying wage, back pay and attorneys’ fees awarded under the statute.
A self-initiated, internal wage and hour audit is an
important risk management tool that can identify potential issues and resolve
compliance concerns before they result in wage claims. The audit should be done
in conjunction with legal counsel.
In addition to reviewing the company’s written pay policies,
the company should examine whether employees are properly classified as exempt
or nonexempt. The company must first decide whether to review all positions or
certain job categories of concern. Such an audit would necessarily include
monitoring and assessing the employees’ actual job duties, reviewing the job
descriptions, making sure that the job descriptions are updated and accurately
reflect what the employees are doing, and then determining on a case-by-by case
basis whether the employees are properly classified.
In examining pay practices, the company would assess how it
calculates and pays wages. For example, are nonexempt employees being paid
minimum wage and overtime in compliance with federal and/or state law? Are all
applicable payments being included in calculating the regular rate and overtime
pay? Are the deductions being made proper?
The company also needs to determine whether all hours worked
are being recorded and paid. Questions to ask include:
the company’s timekeeping system provide for accurate recording of hours
employees record all hours worked, including time reviewing and responding to
emails/calls outside of regular working hours, travel time, meeting time, time
worked during unpaid lunch and break times?
company’s rounding practices comply with applicable law?
Misclassification of employees and miscalculation of
overtime can lead to expensive lawsuits or enforcement actions. Taking care to
identify and resolve potential FLSA compliance issues before they occur can
help to avoid costly mistakes.
In light of the current winter
storm pounding the U.S.
with snow and extreme subzero temperatures, this is a short reminder of when
employees must be paid for emergency closures due to inclement weather.
Nonexempt Employees – Generally, hourly workers must only be paid for time
they actually work. They do not need to be paid when the business is
closed or closes early due to a weather emergency. As a side note, when
paying a nonexempt employee on a salary basis, state laws may suggest treating
compensation more like that paid to a salary exempt employee.
Exempt Employees – When the business is closed and salary exempt employees are willing and able to work, they must still be paid their full salary for the week if they perform any work during the week. However, if the business is open (or employees can work remotely), and employees choose not to work, they do not need to be paid for full-day absences, and the business may require use of vacation/PTO benefits. Salary may not, however, be reduced for partial day absences.
There Are Always Exceptions in
Handbooks may provide for paid leave in the face of extreme
weather. In particular, “cookie cutter” handbooks may contain hidden traps (which is our reminder that businesses should have their handbooks reviewed by employment
counsel!). Similarly, union collective bargaining agreements or
other inclement weather policies might create a requirement to pay for missed time.
In a developing national trend,
even when the employer is open for business, state and local paid sick
leave ordinances may require that employees be permitted to use
available paid sick leave with little notice when, for example, a child’s
school is closed due to a weather emergency. Employers should be
sensitive to this issue, especially if they have not previously implemented written policies or complied with the requirements of
these local ordinances.
Some state and local laws also
require reporting pay when employees either report to work and
are sent home before working their full shift, or when their schedule is
changed or cancelled with insufficient notice. Such laws may apply to weather
Finally, employee morale
and goodwill might dictate that an employer err on the side of paying
for missed time.
Employers should review their
employment policies in light of these developing laws and trends to make the
determination of whether employees should be paid for a business closure or other weather-related absence. Experienced employment counsel should also be consulted to make sure the
business is operating in a way that avoids needless
wage and hour exposure.
Around the holiday season, many employees take time off and
businesses close down. Additionally, some businesses pay out bonuses to
employees around the holiday season. All of these scenarios can impact overtime
pay for non-exempt employees.
CLOSURE OF BUSINESS
Non-exempt employees generally (exceptions follow) only need
to be paid for hours they actually work – and not for holidays or
weather-related office closings and are entitled to overtime for hours worked
over 40 in a workweek. For example:
employees do not need to be paid for New Year’s Day if they are given the day
the business is closed during inclement weather (e.g., snow days, burst pipes),
non-exempt employees do not need to be paid when the business is closed and
they are not working.
employees report to work and are sent home early (e.g., due to imminent ice
storm), then non-exempt employees only need to be paid for the hours they
worked, and not for the time that they were sent home early and are not working.
Where non-exempt employees perform work on a holiday
(federal, state, etc.), they only need to be paid overtime (time-and-a-half) if
they have worked over 40 hours in the workweek (or 8 hours in a day in some
states): For example: An employee who works New Year’s Eve and New Year’s
Day does not receive a shift premium (sometimes referred to as “overtime”)
merely by virtue of working a holiday, unless the employee has actually worked
more than 40 hours – in which case, overtime is paid only for those hours
worked over 40 in the week.
Exceptions: Various state wage laws,
employer policies (e.g., employee handbooks) and other contracts may obligate
an employer to pay employees for certain holidays or business closings, and
even pay shift premiums for working on holidays. Further, an employer policy
may state that the holiday is counted as “hours worked” for overtime purposes.
Make sure to review your policies carefully when administering payroll for
holidays and closure.
Exempt employees are those who are not covered by the FLSA’s
overtime requirements. When paid on a salary basis, these employees’ salaries
may not be reduced in any week in which they work, except for limited
circumstances (e.g., the employee’s personal absence not for sickness or
disability, first/last week of employment). These exceptions do not permit an
employer to reduce a salaried, exempt employee’s wages for holiday or inclement
weather closures. Thus, these employees must be paid their regular, full
salary, even though the business is closed for a holiday or due to weather
(assuming the weather closure was for less than a week).
Employers must be careful when paying out bonuses at the end of the year to non-exempt employees. As with other bonuses, a holiday bonus must be included in overtime calculations for nonexempt employees unless it is completely discretionary or is a gift. If a bonus is promised or expected or is dependent on the quality, quantity or efficiency of production or hours worked, it must be included in the regular rate used for determining overtime pay. This becomes even more complicated at the end of the year. For example, if on January 1, the company promised a bonus if the production department made 10,000 widgets by December 15, 2018. If the production department achieved this goal and each non-exempt employee was paid a $100 bonus, that bonus would have to be allocated over the applicable period (50 weeks from 1/1 – 12/15). Then each non-exempt employee would become entitled to additional overtime for each week they worked overtime during that entire 50 week period based on the fact that the$100 bonus payment increased their regular rate and therefore the applicable overtime rate.
Bottom Line: Employers need to be cognizant of
how holiday closures and bonuses may impact their overtime requirements for
The Obama administration’s goal with this Final Rule, announced on 5/23/2016, was to give approximately 4 million workers the ability to earn overtime pay, instead of getting paid a fixed salary since many employers would not be able to afford to pay their otherwise exempt employees $47,476 annually. Implementation of this new rule had been temporarily stalled in a federal court in Texas just prior to it going into effect this past December 1st (see our prior articles: Court Enjoins DOL Overtime Rule and; Business Realities Under the Halted DOL Final Overtime Rule).
However, on August 31, 2017, Judge Amos L. Mazzant of the United States District Court, Eastern District of Texas answered many business owners’ prayers by ruling the DOL indeed exceeded its authority by more than doubling the minimum salary threshold for exempting white-collar employees (see the full case here).
The judge did not say the DOL could not raise the minimum salary at all. Rather, relying heavily on Chevron, USA, Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), the judge stated that by more than doubling the current minimum threshold, the DOL effectively eliminated the need for looking to the employees’ actual duties and responsibilities—which was the essence of Congress’s intent when it created the FLSA white collar exemptions. The judge looked to the plain meaning of what it means to work in an executive, administrative and professional capacity concluding the primary focus was not the salary minimum but instead the actual duties and responsibilities.
What are the ramifications? The Department of Justice voluntarily dismissed its appeal of Judge Mazzant’s earlier preliminary injunction ruling putting the Final Rule on hold, so it seems unlikely it will appeal this ruling. However, this decision could catapult the Trump administration to issue a new rule providing for a more moderate increase in the minimum salary threshold – one that does not vitiate the primary focus of the “white collar” overtime exemptions: the employees’ actual duties and responsibilities.
The good news for now is that employers can continue to follow the previous DOL regulations for white collar exemptions (i.e., duties test and salary test).
If you did not do so previously, analyze your exempt positions to confirm they meet the duties test and are truly exempt positions. For example, is your manager truly a manager or is she really a lead worker? Is this manager hiring, firing and disciplining two or more employees? Is your payroll clerk clearly just doing data entry or is he exercising independent discretion and judgment? If the position does not meet the duties test, you transitioning the position to make it overtime eligible.
Ensure management is trained to enforce policies related to overtime pay such as those relating to working time, time clock procedures, meal and rest breaks, working off the clock issues, etc.
Did you already make changes to your employees’ pay or duties based upon the final rule going into effect on December 1, 2016? While there are ways to change those decisions (i.e., you can change an employee’s pay moving forward for work not yet performed), you need to keep in mind morale issues for employees whose compensation may decrease either by way of a salary reduction or loss of overtime pay. In these situations, it is highly recommended that you work with your counsel on determining the best practices for your business and your workforce.
With the judge’s ruling, many business owners will be able to find some comfort in being able to keep their exempt employees on a reasonable salary without having to break the bank.
As we previously reported, on 11/22/2016, Judge Amos Mazzant (E.D. Texas) granted a preliminary injunction that halted the 12/1/2016 implementation of the DOL’s Final Overtime Rule, which would have more-than-doubled the minimum salary level for executive/administrative/professional exempt employees.
On 12/1/2016, the U.S. DOL filed a notice of appeal to the Fifth Circuit Court of Appeals, indicating that it strongly believes that the DOL followed all required administrative processes, and there is no reason to delay implementation of the Final Rule.
This fight is not over. Employers that have not yet undertaken serious analysis of the duties of claimed exempt positions should do so promptly and determine the strategies they will implement should the injunction be vacated. Stay tuned for further news and analysis of this hotly evolving issue.
Today, the U.S. Department of Labor (“DOL”) has announced that they are issuing a proposed rule to increase the minimum salary requirements under the Fair Labor Standards Act for exempt employees. A draft version can be found at: http://www.dol.gov/whd/overtime/NPRM2015/OT-NPRM.pdf. The final proposed rule will be issued in the Federal Register and will provide a comment period for the public.
The proposed rule sets forth guidance and requests comment on the following proposed changes:
Set the minimum salary level to qualify for the white collar exemptions at 40% of the national weekly earnings for full-time salaried employees ($921 per week or $47,892 annually but expected to increase to $970 a week and $50,440 annually in 2016);
Increase the minimum salary for Highly Compensated Employees to 90% of the national weekly earnings of full-time salaried workers ($122,148 annually);
Establish a mechanism for automatically updating the minimum salary to meet the exemption on a yearly basis. While the proposed rule sets forth different types of mechanisms for calculating the automatic update (using a fixed percentile of wage earnings or using the CPI-U (an economic indicator for measuring inflation)) they do not identify which mechanism will be utilized;
Increase the minimum salary level for exempt employees in American Samoa to $774 per week; and
Change 29 CFR 541.709 to increase the current base rate for employees in the motion picture industry from $695 to $1,404 per week.
As stated, this is a proposed rule that is subject to a required comment period. The rule will not go into effect until the comment period has ended. However, employers MUST be cognizant of the proposed salary increases and begin contemplating how this is going to affect your current workforce.
Further, while not proposing any current rulemaking on the issues identified below, the proposed rule requests public comment on the following:
Whether to allow non-discretionary, incentive bonuses and/or commissions to satisfy 10% of the standard salary requirement for the white collar exemptions and if such are allowed how often these bonuses/commissions must be paid (monthly or more frequently);
Whether changesshould be made to the duties test for thewhite collar exemptions including:
Whether employees should be required to spend a minimum amount of time performing work that is their primary duty for qualifying for the exemption and what that minimum amount should be, if any?
Should the DOL follow the California state model and require 50% of an employee’s time be spent performing the employee’s exempt primary duty?
Does the current duties test appropriately distinguish between exempt and non-exempt employees? Should the long/short tests be brought back?
Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and non-exempt duties concurrently) working or should there be a limit on the amount of non-exempt work?
Whether the Department should add examples of additional occupations to provide guidance for employers in administering the exemptions?
Examples from employers in the computer and technology industries as to what additional occupational titles or categories should be included in the examples along with duties that would generally meet or fail the exemption.
These additional inquiries are indications that the DOL is looking to potentially make further revisions to the exemptions.
In Light of the Proposed Regulations, Employers Should Analyze the Following:
How many of your current employees will be affected by this new rule?
Is a salary increase for those who do not currently meet the salary requirement a plausible financial decision to the required increases?
Are there job positions that should now be reclassified as non-exempt and the employees will now be entitled to overtime if they work over 40 hours?
Tightening up policies regarding working overtime and working with management to limit the number of overtime hours worked for non-exempt employees.
Reviewing handbooks and policies regarding exempt and non-exempt status.
Reviewing benefits applicable to exempt and non-exempt employees and how a change in status may impact the benefits to your employees.
Employers have OPTIONS Regarding these Proposed DOL Changes:
Increase the employee’s salary to that proposed in the new regulations so they continue to meet the exemption;
Keep the salary the same and pay the required overtime payments based on the employee’s regular rate of pay;
Reduce the employee’s salary or change the employee to hourly at a lower rate so the total earnings do not change after overtime is paid;
Eliminate the employee working any overtime hours; or
Some combination of the above options.
The attorneys at SmithAmundsen are here to assist employers in navigating these business changes.