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March 13, 2019 in HR

FLSA Changes: How to Prepare for the Newly Proposed Overtime Threshold

The U.S. Department of Labor (DOL) recently announced a proposed rule that increases the salary threshold to $35,308 for employees who qualify for the “white collar” exemption under the Fair Labor Standards Act (FLSA). The pending FLSA changes have sparked deja vu among employers, evoking flashbacks of the 2016 final overtime rule.

As an employer, you’re likely anxiously awaiting the fate of the new proposal. While waiting, it’s important to prepare in case the regulations come to fruition.  

Here we share preparation strategies as well as background information on the new proposal, requirements of the new rule, and the impact on employers.  

The Pending FLSA Changes: Background

The Fair Labor Standards Act addresses minimum wage, labor for minors, overtime, and how payment records are kept. FLSA rules affect both private employees and government workers, with just a few exceptions.

On May 18, 2016, the Obama-era DOL issued a final FLSA overtime rule, which hiked the salary threshold from the current $23,660 per year to $47,476 per year. This increase applied to salaried executive, administrative, and professional employees—“white collar” workers—who qualify for the FLSA’s minimum wage and overtime exemptions. However, the rule faced a series of legal challenges and was ultimately vacated by a federal court.   

In 2017, under the Trump administration, the DOL expressed interest in revisiting the overtime rule. Note that in his congressional testimony, then-nominated Secretary of Labor, Alexander Acosta, indicated his support for increasing the number of low-wage employees who are eligible for overtime. Acosta declined to follow the threshold set by the Obama-era DOL, instead  suggesting a salary level closer to $33,000.

On March 7, 2019, the DOL announced a new proposed rule that boosts the salary threshold to $35,308 per year. As most analysts predicted, the new proposal hits in between the 2016 exemption and the threshold currently in place. It is being published in the Federal Register, followed by a 60-day comment period.

The DOL then issues final regulations, and that could happen anytime in 2019 or the process could move into next year. The National Law Review reports that the DOL is working toward a deadline before the 2020 presidential election. According to the DOL, over one million U.S. workers would  be eligible for overtime under the new regulations.

Highlights of the Pending Changes

The new proposed rule:  

  • Increases the salary threshold, for overtime eligibility, from $23,660 per year to $35,308 per year.
  • Raises the annual compensation for highly compensated exempt employees from $100,000 per year to $147,414 per year.
  • Allows employers to include non-discretionary bonuses and incentive payments (that are paid yearly or more often) to make up 10 percent of the proposed salary level.

The proposed new rule makes no changes to the FLSA job duties test (which we summarize below), nor does it require automatic adjustments to the salary threshold.

Impact on Employers

If the proposed regulations come to pass, salaried executive, administrative, and professional employees who meet the FLSA duties test must receive at least the new minimum salary requirement in order to retain their FLSA exempt status. Salaried employees who receive less than the new minimum salary requirement will be eligible for overtime.

For example, to keep the FLSA administrative exemption, you will need to pay employees who fall in that category at least $35,308 per year. This equals $679 per week. Paying them less than $35,308 per year will render them non-exempt. You will have to pay them overtime for work exceeding 40 hours in a week.

The above example reinforces the fact that “exempt” does not necessarily mean “salaried.”

An employee can be salaried yet non-exempt. Salaried employees are exempt only if they satisfy the FLSA salary basis and job duties tests. Currently, to fulfill the salary basis test, the employee must earn at least $23,660 per year. To satisfy the job duties test, the employee must perform specific duties. These duties are defined by the FLSA. If a salaried employee does not meet the salary basis and job duties tests, then he or she is non-exempt.

The proposed rule applies to all employers with FLSA coverage. However, sectors that traditionally pay lower salaries—such as food and beverage, hospitality, and nonprofits—are likely to be more affected by the changes than others. It might be difficult for employers in those sectors to increase the exempt employees’ salaries; these employees may need to be reclassified.  

However, according to an article published by the Society for Human Resource Management (SHRM), employers should hold off on reclassifying employees because “There is a long road ahead before there is a final rule.” The proposal is in the initial stage of what is predicted to be a lengthy process.

How to Prepare for an FLSA Rule Change

Step 1: Separate Employees into the Exempt and the Non-Exempt

All non-exempt employees are eligible for overtime, while exempt employees are not (hence, being exempt from the rule).

The Non-Exempt Worker:

  • Makes time and a half for every hour worked beyond the standard 40-hour work week.
  • Receives greater protections under federal law.

The Exempt Worker:

  • Not eligible for overtime, but can be paid extra for work hours over 40 in a week, provided certain FLSA guidelines are met.
  • Makes a set salary and typically holds an executive, administrative, or professional position.

Step 2: Initiate a Comprehensive FLSA Employee Classification Review

Your review of all existing exempt employees should cover job descriptions, job duties, and current salaries. The Department of Labor provides a list of the exemption categories, which we utilized to create the PC Payroll Employee Classification Checklist. Answer the questions below to make sure your employees are classified properly under the FLSA.

Executive Employees

  • Does the employee make at least $679/week on a salary basis?
  • Is the employee’s primary duty managing a department, subdivision, or the company as a whole?
  • Does the employee regularly oversee at least two or more full-time employees or their equivalent?
  • Does the employee have the power to hire or fire other employees or are their recommendations for hiring/firing/promoting other employees given added consideration?

The answer to all of these must be “YES” in order to qualify for the executive employee exemption.

Administrative Employees

  • Does the employee make at least $679/week on a salary basis?
  • Is the employee’s primary duty performing office or non-manual tasks directly related to business operations?
  • Do the employee’s primary duties include discretion re:matters of significance?

The answer to all of these must be “YES” in order to qualify for the administrative employee exemption.

Learned Professional Employees

  • Does the employee make at least $679/week on a salary basis?
  • Do the employee’s primary duties include working on tasks with advanced knowledge, intellectual in character, and with the required consistent exercise of discretion and judgement?
  • Does the employee work in the fields of science or learning, with a background including specialized intellectual instruction?

The answer to all of these must be “YES” in order to qualify for the learned employee exemption.

Creative Professional Employees

  • Does the employee make at least $679/week on a salary basis?
  • Do the employee’s primary duties include work in the artistic or creative fields, demonstrating invention, imagination, originality, or talent?

The answers to these must be “YES” in order to qualify for the creative employee exemption.

Computer Professional Employees

  • Does the employee make at least $679/week on a salary or fee basis, OR, if paid by the hour, at least $27.63/hour? (Note that these amounts may be changing as well.)
  • Is the individual employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field?
  • Do the employee’s primary duties include:

1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

2) The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, 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, the performance of which requires the same level of skills?

The answer to all of these must be “YES” in order to qualify for the computer employee exemption.

Highly Compensated Employees

  • Does the employee perform office or non-manual work?
  • Does the employee receive a total annual compensation of at least $147,414?
  • Is at least $679/week out of the employee’s total annual compensation paid on a salary or fee basis?
  • Does the employee frequently perform at least one of the job duties stated in the executive, administrative, or professional exemption categories (as illustrated above)?

The answers to these must be “YES” in order to qualify for the highly compensated employee exemption.

Step 3: Consult Additional Federal Resources

You should now have a clearer assessment of the potentially exempt and non-exempt workers currently under your employment. If not, here are additional resources from the Federal Government.

  • The Hours Worked Advisor provides information to help determine which hours spent in work-related activities are considered FLSA “hours worked” and therefore must be paid.
  • The Overtime Security Advisor helps determine which employees are exempt from the FLSA minimum wage and overtime pay requirements under the Part 541 overtime regulations.
  • The Child Labor Rules Advisor answers questions about the FLSA’s youth employment provisions, including at what age young people can work and the jobs they can perform.

Employers should also follow these best practices to prepare for the pending FLSA changes:

  • Identify the exempt employees who currently earn less than the proposed salary threshold. See if it would be feasible to raise their pay. Per the SHRM article mentioned earlier, if your exempt employees tend to work a considerable number of extra hours for the week, it may be better to raise their salary to at least the proposed threshold instead of paying them overtime.
  • Note which exempt employees may need to be reclassified because you were unable to increase their pay. If your exempt employees don’t typically work many extra hours, it might be wiser to reclassify them. Reclassification will make them non-exempt and eligible for overtime.   
  • Determine how you might need to handle overtime in the future, such as by limiting overtime or budgeting for more overtime. For example, you might consider bringing in part-time help instead of paying overtime to your existing full-time employees.
  • Develop a strategy for communicating the changes to employees who are likely to be impacted by the changes. Be sensitive when addressing employees’ concerns, and seek their input—especially in circumstances affecting work schedules and pay.
  • Review applicable state laws, which may differ from FLSA rules. If both state law and the FLSA applies, you must use the statute that favors the employee the most.

When Will the Changes Take Effect?

This remains to be seen, as the rule has not yet been finalized. Once the proposed rule is published in the Federal Register, the public will get 60 days to comment, as previously mentioned. When the rule change was proposed in 2016, the DOL received nearly 270,000 comments in response, so we expect a similar influx of comments this year. In addition, industry experts have cautioned that, similar to its predecessor, the proposed rule could encounter legal challenges.  

In the meantime, consider evaluating your exempt employees’ job duties to ensure they align with the respective FLSA definition. This will allow you to rectify any current mistakes relating to FLSA exempt status. Most importantly, stay abreast of new developments and be ready to implement the pending changes if they become mandatory.

PC Payroll will monitor the changes and keep you updated on the latest developments. Read more about our comprehensive and customized payroll solutions (including guaranteed compliance for FLSA laws, along with all other federal and state statutes).



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