On May 18, 2016, the Department of Labor announced it will publish an update to the regulations defining the executive, administrative and professional (“EAP”) employee exemption from the minimum wage and overtime protections of the Fair Labor Standards Act (“FLSA”). These updated regulations could have significant operational impact on employers with salaried employees and create increased exposure to FLSA wage claims. The new regulations take effect December 1, 2016. 

Background

Since 1940, the Department of Labor’s regulations implementing FLSA have dictated a three part test that must be satisfied to determine whether an employee meets the EAP exemption: 

  1. the employee must be paid a predetermined and fixed salary not subject to variance based on quantity or quality of work;

  2. the amount of salary must meet a minimum specified amount (the “salary level test”); and

  3. the employee’s job duties must primarily involve executive, administrative or professional duties further defined by the regulations (the “duties test”). 

These implementing regulations were last updated in 2004, when the salary level test was raised to $23,660 or $455 per week. The 2004 updated also clarified the duties test and created a new exemption for highly compensated employees discussed further below. 

Critical changes in the new regulations

The updated regulations announced May 18th will contain three primary modifications of concern:

  1. The new regulations increase the salary level test to a salary level of $47,476 annually or $913 per week.

In application, the increased salary level test dictates that any salaried employee who makes more than $47,476 per year or more will qualify for the EAP exemption provided the remaining two factors are also satisfied. However, any salaried employee earning $47,475 or less per year will no longer qualify for the EAP exemption. Despite the salary level test increase, the regulations for the first time provide that certain non-discretionary bonuses, incentive payments and commissions can be included in the EAP calculation up to 10% of the employee’s salary. 

  1. The new regulations increase Highly Compensated Employee (“HCE”) test for exemption of highly compensated employees to $134,004 annually.

First established in 2004, the HCE provided businesses with an overtime exemption for highly compensated employees if certain requirements were met, including if such employees customarily and regularly perform any one or more of the exempt duties of an executive, administrative or professional employee. The new regulations increase the HCE exemption to an annual salary of $134,004 from the previous level of $100,000. 

  1. The new regulations include a mechanism to automatically update the salary level test every three years.

The new regulation provides that the salary level test will automatically update and adjust as necessary to a level equivalent to 40th percentile of the weekly earning of full-time salaried employees in the lowest-wage census region. Likewise, the HCE test will automatically be updated to the equivalent of the 90th percentile of annual earnings of full-time salaried workers nationally. Updates will be published in the Federal Register no less than 150 days before implementation. The first automatic update will take place on January 1, 2020. 

Best practices for Employers

Businesses with salaried employees may be affected by the new regulations by way of additional labor costs, budgetary issues, changes in operational capacity and potential exposure to FLSA claims. Employers should address these issues well in advance of the December 1st effective date. Suggested actions to be taken by employers may include, but are not limited to:

  • Survey employee rosters to determine what employees and business units will be affected;

  • Determine whether salaried employees that will now be below the $47,476 EAP salary level test threshold will be converted to hourly or remain salaried employees. It may make budgetary sense to give employees who are close to the threshold a pay increase to avoid the administrative burden of tracking hours, overtime expense and potential FLSA wage claims that may arise as a result of the new regulations;

  • Track the hours worked of salaried employees who are below the EAP salary level test; and develop and implement specific policies and procedures for such employees to document the hours they are working. This step is critical to generate evidence necessary to defend the FLSA wage claims likely to arise under this new regulation;

  • Revise operational budgets to account for increased labor costs and/or decreased manpower based on the new regulations;  

  • Update the employee handbook to reflect any changes to timekeeping policy; and

  • Be prepared to revisit this process no less than six months prior to the updated regulations that will now automatically occur every three years beginning January 1, 2020. 

Contact a Trueblood Law Group, P.A. attorney for more information regarding how these new overtime regulations may impact your business and employees. To speak to an attorney, please email us directly at info@truebloodlawgroup.com or call (954) 302-8610.

This information has been prepared by the Trueblood Law Group, P.A. for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.