Changes to the Salary Level Under the Fair Labor Standards Act

November 17, 2016

By: Barry Dorans

There has been a lot of publicity about the regulatory changes that take effect December 1, 2016 under the Fair Labor Standards Act (“FLSA”). This article gives an overview of the change.

WHAT WAS THE PRIOR LAW?

Prior to December 1, 2016, if an employee was exempt, the employer did not have to pay overtime. One common exemption was the Manager Exemption. To qualify for that exemption: (1) the employee’s primary duty must fit within a certain classification, and (2) the employee must be paid on a salaried basis of at least $455 per week ($23,660 per year). While there are some employees that are exempt from overtime, even if they are not paid on a salaried basis, the manager exemption required payment on a salaried basis.  

WHAT IS THE NEW STANDARD?

Now, to qualify as exempt from overtime pay as a manager, the primary duty test is unchanged, but the floor for the salary basis has been increased to at least $913 per week or $47,476 per year. This amount changes every three years.

WHAT ARE THE EMPLOYER’S OPTIONS?

The employer can give a raise to the managers so that they are making at least $913 per week, reduce their hours so that they work no more than 40 hour per week, determine if they qualify for an exemption that does not require payment on a salaried basis, or pay overtime for all hours over 40 in any work week. The employer can reset the hourly rate so that once they receive time and a half they will receive a similar amount per week as they were making prior to December 1, 2016, though the base rate must equal or exceed the minimum wage.

POTENTIAL PROBLEMS

While the employer can get close to the same compensation by converting to an hourly rate with a rate of time and one half for overtime, it probably will not be exact unless the employee consistently works the same number of hours of overtime each week. If the employer bases the hourly rate on an assumed 10 hours of overtime per week and the employee only works five hours of overtime, can the employer pay them extra in that week to make up to the difference? Not really. If the employer pays extra that week as a bonus, and that bonus is either expected by the employee or promised by the employer, the bonus is treated as compensation for the week, the employer must pay a premium on that bonus when paying for the five hours of overtime. Other potential variations include if the employee works less than 40 hours in a week, such as if they use a day of vacation, or when workload increases dramatically and greatly increases the amount of overtime.

CONCLUSION

In conclusion, the new changes will likely require most employers to change how they treat their managers. Some of those employees may be re-characterized to fit within another exemption. For the others, either the employer will have to increase the salary to equal the new minimum, or transition the employee to an hourly employee with overtime at time and a half. The employer needs to carefully structure the pay policy so as to not violate the overtime rules, yet not drastically increase payroll. Employers need to consult with an attorney to make sure employees are paid correctly. If an employer fails to pay overtime, the Department of Labor has the right to bring suit on behalf of all of the employees to recover all of the unpaid overtime, plus liquidated damages of an additional 100% of the amount owed against the company and its principals personally.

Note this is a brief overview, please consult with an attorney to be certain you are in compliance with the Fair Labor Standards Act.

UPDATE ON THE NEW RULE OF THE FAIR LABOR STANDARDS ACT

On November 22, 2016, a Federal Judge in Texas issued a nationwide injunction in the case of State of Nevada, et al. v. U. S. Department of Labor, CA No.: 4:16-cv-00731. The Court has enjoined the Department of Labor from enforcing the new rule raising the minimum salary level to $47,476 per year.

First, this is only a preliminary injunction. The Court has not issued a final order about whether or not the new rule is valid under the Fair Labor Standards Act. Second, the Department of Labor will have the right to appeal this ruling. Accordingly, it will take months, at the least, to get a final resolution on the validity of the new rule.

Until this Order is amended or overturned, the Department of Labor is prohibited from enforcing its new rule. That does not, however, prevent an employee from bringing a claim that under the new rule they are no longer exempt. Further, if a court were to subsequently dissolve the injunction, or enter an order finding that the new rule is valid, it is not clear how they would handle the period between December 1, 2016 and the date of that order. That is, a court could rule that employees who did not meet the new salary test are not exempt during that period. It is quite likely that even if a court did that, an employer would not owe any liquidated damages for failing to comply with the rule, so long as the injunction remained in effect.

The safest course of action for employees making less than $47,000 is to convert them to hourly and set their hourly rate, including overtime, so it is comparable to the total pay they received in the prior year, or find another exemption for which they qualify. If an employer is willing to accept more risk, it may continue to treat employees as salaried, so long as they are paid more than $23,660 per year and meet the remaining qualifications for that exemption, however, they do run the risk of having to pay overtime for the period beginning December 1, 2016.

You should consult your attorney on how to best react to this development.