DOL Issues Sweeping Changes to FLSA Regulations

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1 STROOCK & STROOCK & LAVAN LLP DOL Issues Sweeping Changes to FLSA Regulations May 19, 2016 Introduction This week, the U.S. Department of Labor ( DOL ) issued new regulations that will significantly impact which employees are exempt from the minimum wage and overtime pay requirements of the federal Fair Labor Standards Act ( FLSA ). The new regulations will double the annual salary threshold for the overtime exemption to $47,476. The salary level will then be adjusted every three years in accordance with wage growth. The new regulations will become effective on December 1, The FLSA provides that, among others, bona fide executive, administrative and professional employees, outside sales employees and computer employees are exempt from the FLSA s minimum wage and overtime pay obligations. At present, the federal 1 This Stroock Special Bulletin does not address issues related to any state laws or regulations. Some states have established higher salary thresholds, additional requirements for employees to be exempt from minimum wage and overtime obligations, and different overtime calculation formulas. minimum wage is $7.25 per hour. 2 Generally, overtime pay one and one-half times an employee s regular hourly wage is required after 40 hours in a workweek. The DOL s regulations provide tests to determine whether an employee is exempt from these requirements. The Regulations The regulations set forth three tests, all of which must be satisfied for an employee to be exempt from the FLSA s minimum wage and overtime requirements: (1) a salary basis test; (2) a salary level test; and (3) a duties test. The new regulations significantly increase the salary level test and, therefore, will markedly reduce the number of employees who are exempt under the FLSA. 2 For example, in New York State, the minimum wage is currently $9.00 per hour. Beginning on December 31, 2016, the minimum wage for all employees in New York will begin to increase, eventually to $15.00 per hour. The rate of the increase varies depending on the size and location of the employer. See New York Passes Landmark Employee Rights Laws, Stroock Special Bulletin, April 11, 2016, available at Wage.pdf. STROOCK & STROOCK & LAVAN LLP NEW YORK LOS ANGELES MIAMI WASHINGTON, DC 180 MAIDEN LANE, NEW YORK, NY TEL FAX

2 The Salary Basis Test Both the current and the recently issued regulations generally require employees to be paid on a salary basis if they are to be considered exempt. 3 Employees are salaried under the regulations if they regularly receive a predetermined amount of compensation that is not subject to reduction because of variations in the quality or quantity of work they perform. With limited exceptions, employees must receive their full salary for any week in which they perform any work, without regard to the number of days or hours worked. Salary Level Test The former regulations required, with a few exceptions, that employees be paid a minimum salary of $455 per week to qualify for an exemption. They also provided a streamlined rule for highly compensated employees employees who earned $100,000 or more annually. Highly compensated employees who customarily and regularly perform one or more of the regulations specified exempt duties of an executive, administrative or professional employee are deemed exempt under both the old and the new regulations. Significantly, the new salary level threshold raises the minimum salary from $455 per week to $913 per week, which equals $47,476 per year, to potentially satisfy the overtime exemption. 4 The 3 4 Under certain circumstances, administrative, professional and computer employees may be paid on a fee basis for a unique job. To determine whether employees paid on a fee basis meet the minimum salary level requirement, the employer must consider the time worked on the job and the amount paid to calculate an hourly rate. If, when the hourly rate is multiplied by 40, the fee DOL estimates that approximately 4.2 million additional workers will now be eligible for overtime compensation. Employers may, of course, raise the salaries paid to employees who otherwise satisfy the tests to be exempt. Given the expense of paying time and one-half times an employee s regular hourly rate for all time worked after 40 hours in a workweek, an employer would undoubtedly increase the salary of a manager currently earning $42,500 so that he or she will be paid more than 47,476 per year. For the first time, the regulations permit employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary requirement. Nondiscretionary bonuses include promised bonuses announced to employees to induce them to work efficiently or to remain with the company, such as group production bonuses, bonuses for quality and accuracy of work, or incentive payments. The salary rate for highly compensated employees also has been increased. To qualify for the streamlined exemption, highly compensated employees must earn a minimum of $134,000 annually. The highly compensated employee must receive at least the full standard salary amount ($47,476) on a salary or fee basis, but, as was the case previously, incentive payments may count toward the total annual compensation requirement. Finally, the new regulations provide a mechanism to automatically update the threshold salary level every three years. This salary level will be adjusted to equal the 40 th percentile of weekly earnings of full-time salaried workers in the lowestequals at least $913, the person would meet the minimum salary requirement. 2

3 wage Census Region. Likewise, the highly compensated employee threshold will automatically adjust to equal the 90 th percentile of annual earnings of full-time salaried workers nationally. The Duties Test The new regulations do not change the existing job duty requirements. Instead, by doubling the minimum salary level threshold, the new regulations will substantially limit the number of workers who may potentially be exempt from overtime that is, the number of employees for whom such test is relevant. Executive Employees Executive employees qualify as exempt if: (1) their primary duty is the management of the enterprise or a customarily recognized department or subdivision; (2) they customarily and regularly direct the work of two or more other full-time (or full-time equivalent) employees; and (3) they have the authority to hire or fire other employees (or their suggestions and recommendations as to hiring, firing, advancement, promotions or any other change of employment status are given particular weight). Administrative Employees An employee would qualify under the administrative exemption if: (1) their primary duty is office or non-manual work directly related to the management or general business operations of the employer or the employer s customers; and (2) their primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Professional Employees To qualify as exempt, Learned Professionals (e.g., accountants and engineers) must primarily engage in work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. In addition, employees who have substantially the same level of knowledge and who perform substantially the same work as employees with degrees, but who acquired the advanced knowledge through a combination of intellectual instruction and work experience, are also considered exempt. Further, physicians, lawyers and teachers are exempt from the minimum salary requirements included in the regulations. To qualify as a Creative Professional, an employee must perform work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Outside Sales Employees Outside sales employees are exempt if: (1) their primary duty is making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) they are customarily and regularly engaged away from the employer s place of business in performing their primary duty. The minimum salary requirements do not apply to the outside sales employee exemption. Computer Employees Computer Employees include computer systems analysts, computer programmers, software engineers and similarly skilled workers. To be considered exempt, such employees primary duties must consist of: (1) the application of systems analysis techniques and procedures to determine 3

4 hardware, software or system functional specifications; (2) the design, development, documentation, analysis, creation, testing or modification of computer systems programs, based on and related to user or system design specifications; (3) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) a combination of the aforementioned duties. In addition, Computer Employees who earn at least $27.63 per hour and perform any or all of these duties are exempt, regardless of their annual salary. Computer employees may also separately satisfy the executive or administrative exemptions. For More Information Howard S. Lavin Elizabeth E. DiMichele hlavin@stroock.com edimichele@stroock.com Beth A. Norton bnorton@stroock.com 4

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