In May 2016, the Department of Labor enacted several important changes to the Fair Labor Standards Act (FLSA) relating to overtime-exempt employees. These amendments substantially expand the number of salaried workers that will be able to claim overtime wages. These new rules go into effect on December 1, 2016. It is important for unions and employees to understand these changes in order to ensure that employers can be held accountable to pay their workers fairly. The most important changes are:
1. An increase in the salary threshold for Executive, Administrative, Professional and Computer (“EAP”) employees (from $23,660 to $47,476). This means employees making less than $47,476 cannot be FLSA-exempt regardless of their duties.
2. An increase in the salary threshold for Highly Compensated Employees (HCE) (from $100,000 to $134,004). This means employees making more than $134,004 are FLSA-exempt under a relaxed “duties” test – only minimal involvement in EAP-related duties is required.
3. The creation of an automatic updating mechanic to increase these levels in the coming years.
4. Under the new rules, the employer may count nondiscretionary bonuses and incentive payments towards salary thresholds, but they may not count for more than 10% of the total.
More specific detail on each of these changes follows:
1. Salary Threshold for Executive, Administrative, Professional and Computer employees
One of the largest categories of overtime-exempt employees are Executive, Administrative, Professional and Computer employees. Each of the exemptions is intended to cover salaried employees in highly-skilled or managerial positions and each of these four categories has a slightly different “duties test.” However, the tests do not apply unless the employee meets the salary basis test as well. The salary basis test has two components: (1) the employee must be paid on a salaried, not an hourly, basis, and (2) the salary paid must exceed a minimum threshold.
The rules for salary basis payment have not changed. Generally speaking, the salaried employee must receive as pay a predetermined amount of compensation, which cannot be reduced because of variations in the quality or quantity of the employee’s work. An employee’s salary under these exemptions must be paid each week an employee works, regardless of the number of hours worked each day (exempt employees do not need to be paid in a week in which no work is performed). Reductions in pay for part-day absences destroys the exempt status of the employee, even if the employee otherwise satisfies the applicable duties test. An hourly employee can be docked pay for each hour missed.
Since 2004, the salary threshold to meet any of these exemptions has remained at $23,660 per year ($455 per week). The 2016 FLSA amendments raise this salary threshold to $47,476 ($913 per week). This salary level change will open up overtime eligibility to many more employees.
2. Salary Threshold for Highly Compensated Employees
In addition to the salary-based overtime exemptions for EAP employees, prior to December 1, 2017 there is an exemption for employees who earn more than $100,000 per year. The HCE exemption has substantially lower standards for evaluating the duties of the employee, known as a “minimal duties test.” An HCE overtime-exempt employee has to simply be in a position where the employee’s primary duty includes performing office or non-manual work and the employee customarily or regularly performs at least one of the exempt duties of an EAP overtime-exempt employee.
The 2016 FLSA amendments raise this salary threshold from $100,000 per year to $134,004 per year. The types of pay that can meet this threshold are wider than that of the EAP exemption — the total annual compensation may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation; though medical, retirement and fringe benefits are not included. The rise in the HCE threshold will render more highly-compensated employees eligible for overtime, provided they are not exempt under the traditional duties tests for Executive, Administrative, Professional and Computer (“EAP”) employees.
3. Automatic Updating
Prior to the 2016 FLSA amendments, there was no formula or structure to update the overtime-exempt salary thresholds; the levels remained stagnant since 2004. With the passage of the 2016 FLSA amendments, the EAP salary threshold is now set at the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census Region (currently the South; $47,476 per year) and the HCE salary threshold is set to equal the 90th percentile of earnings of full-time salaried workers nationally ($134,004 per year). Rather than waiting for the Department of Labor to choose when to update this level in the future, these levels are slated to update automatically every three years based on the 40/90 percentile bases. The Department of Labor is required to public the upcoming salary thresholds 150 days before their effective date.
4. Inclusion of Nondiscretionary Bonuses and Incentive Payments for EAP Employees
Prior to the 2016 FLSA amendments employers were not allowed to include nondiscretionary bonuses and incentive payments, such as commissions, in calculating the annual salary of an EAP overtime-exempt employee. After December 1, 2016, employers will be permitted to use nondiscretionary bonuses and incentive pay in the calculation of an employee’s annual salary, however, nondiscretionary bonuses and incentive pay is capped at 10 percent of the required salary threshold. Discretionary bonuses, such as an unannounced holiday bonus, or a bonus that is at the subjective discretion of a manager, do not count toward the EAP overtime pay threshold.