The US Department of Labor (“DOL”) recently revamped regulations governing the exemption of executive, administrative and professional (“EAP”) employees from the minimum wage and overtime pay protections under the Fair Labor Standards Act. Effective December 1, 2016, in order to be exempt from overtime pay (“OT”) for working over 40 hours in a workweek, EAP employees must earn at least $913 per week or $47,476 annually. Historically, employers needed to satisfy a (1) “salary basis test” (i.e. fixed salary not reduced by the quantity of hours or quality of work performed); (2) “salary level test” (last set in 2004 at $455 per week or $23,660 annually); and (3) a “duties test”, to meet the exemption requirement under FLSA. The “duties test” differs for each category of exemption and was historically the area most employers focused their attention to determining if an exemption applies. In 2004, a test was created for exemption for highly compensated executive, administrative, and professional employees (“HCE”) that were paid at least $100,000 annually (and at least $455 per week on a salary or fee basis) that had a less stringent “minimal duties” test requirement. The DOL is also raising the HCE compensation requirement to $134,004. Automatic updates to the thresholds will occur every three years beginning January 1, 2020.
This regulatory change means that regardless of whether an EAP employee satisfies the “duties test”, which was not changed by the new regulations, employees are entitled to OT pay if they earn less than $47,476 annually or $913 per week. The DOL claims this simplifies the exemption but employers should begin to regularly track hours of their EAP employees earning less than $47,475 annually to determine the impact of the changes on their business. Also, many EAP employees not accustomed to tracking their time will be asked to make an adjustment. In preparation for the change to take effect on December 1, 2016, Employers will be faced with decisions about whether to pay more in wages through overtime premiums, whether to reduce hours worked, pay a lower base wage to offset the new overtime premiums, boost salary above the threshold to avoid tracking time and paying overtime premiums, etc. Not surprisingly, these regulations were applauded by labor groups but not well received by business groups. In addition to the actual financial cost associated with tracking hours, employees aren’t always receptive to doing it and morale may be impacted when a once exempt employee has to “punch the clock”. It remains to be seen how businesses will react to these changes but it is clear that employers should begin to familiarize themselves with these changes as soon as possible. Feel free to contact us if you have questions concerning the new regulations.