The U.S. Department of Labor (DOL) has released the finalized rule on overtime exemptions for white-collar workers under the Fair Labor Standards Act.  It is expected to expand the pool of nonexempt workers by more than 1 million.

The new rule is scheduled to take effect on January 1, 2020. Affected employers should consider prompt action to reduce the impact to their bottom lines

The new rule

Under the finalized overtime exemptions regulations, an employer generally cannot classify an employee as exempt from overtime obligations unless the employee satisfies three tests:

  1. Salary basis test. The employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of the work performed.
  2. Salary level test. The employee is paid at least $684 per week or $35,568 annually.
  3. Duties test. The employee primarily performs executive, administrative or professional duties.

The DOL’s final rule specifically increased the salary level test (previously $455 per week or $23,00 annually). Therefore, if an employee’s salary exceeds the new level, the employee will be ineligible for overtime if he or she primarily performs executive, administrative or professional duties. If their salary falls below it, the employee is nonexempt, regardless of duties.

Employers can use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. If an employee does not earn enough in such bonuses or payments in a given year to remain exempt, the employer can also make a catch-up payment within one pay period of the end of the year. However, the payment will count only toward the prior year’s salary amount.

Highly compensated employees

Neither the salary basis nor the salary level test applies to certain employees (for example, doctors, teachers and lawyers). The new rule provides a more relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $107,432 (including commissions, nondiscretionary bonuses and other nondiscretionary compensation) and at least $684 salary per week.

The final rule sets the total annual compensation threshold at the 80th percentile of weekly earnings of full-time salaried employees nationally.

The DOL opted against automatic adjustments to salary thresholds every three or four years. Instead, the final rule simply indicates the department’s intent to update the earnings thresholds “more regularly in the future,” following the notice-and-comment rulemaking process.

Preparation tips

Employers should begin taking measures to achieve compliance — and minimize the hit to their finances — when the final rule takes effect. Your business may already be well-prepared if you have previously gone through this process. Take care, though, to not rely on past findings as circumstances may have shifted.

A good first step is to check employees’ salary levels against the new thresholds. It may be advisable to give raises to employees who fall just under a threshold and routinely work more than 40 hours per week. Or consider redistributing workloads or scheduled hours to prevent newly nonexempt employees from working overtime.

This also is a good time to review employees’ job duties against the tests for the various exemptions. Check duties on a regular basis, as this is a ripe area of litigation for employees who contend that they deserve overtime despite their job titles. Courts and the DOL agree that actual duties, not job title or even job description, are what matters.

If, according to the final rule, you reclassify currently exempt workers as nonexempt, you must establish procedures for accurately tracking their time to ensure proper overtime compensation. Reclassified employees may require some training on timekeeping procedures.

Plan accordingly

Some employers may find that the new overtime rule substantially increases their compensation costs, including their payroll tax liability.

Contact your trusted advisor to ensure your company is in compliance with the new rule, as well as all payroll tax obligations.

The U.S. Department of Labor’s new overtime rules, which will make many more employees eligible for overtime pay under the Fair Labor Standards Act (FLSA), take effect December 1, 2016 — and nonprofits aren’t exempt. Even if an organization isn’t covered by the FLSA, its employees may be covered as individuals and thus eligible for overtime. Make no mistake: The new rules could have significant repercussions for the compensation of your white-collar workers — and, in turn, your ability to provide services. 

The new salary-level tests for exempt workers

The final rule increases the salary-level threshold for white-collar exempt employees from $455 to $913 per week or $23,660 to $47,476 per year. White-collar employees now can only be exempt from overtime if their jobs meet certain tests for executive, administrative or professional employees, and they also are paid an annual salary of at least $47,476.  

The new rule also increases the salary threshold for highly compensated employees (HCEs) from $100,000 per year to $134,004 per year. The HCE threshold is used to evaluate the fairness of contributions to an organization’s retirement plan. HCEs must receive at least the full standard salary amount — or $913 — per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. But such payments will count toward the total annual compensation. The standard salary and HCE annual compensation levels will automatically update every three years.

Why it matters even if you aren’t covered by the FLSA

The FLSA may apply to 1) businesses or similar entities (what’s known as enterprise coverage), or 2) individuals (individual coverage). Under enterprise coverage, the law applies to businesses with annual sales or business of at least $500,000. For nonprofits, this coverage applies only to activities performed for a business purpose (for example, operating a gift shop). Income from contributions, membership fees, many dues, and donations used for charitable activities don’t count toward the $500,000 threshold. 
Under individual coverage, employees may be covered by the FLSA if they’re engaged in interstate commerce or in the production of goods for interstate commerce — regardless of whether an employee is engaging in such activities for a business purpose. For example, an employee is covered if he makes or receives interstate phone calls, ships materials to another state or regularly calls an out-of-state vendor and uses a credit card to buy food for a homeless shelter. 

The impact on nonprofits

The new rule has obvious budget implications — the money to pay overtime to newly eligible employees will have to come from somewhere. Many have expressed concern that compliance with the rule will lead to the cutting of services.

In addition, according to the National Council of Nonprofits, organizations with government grants and contracts could find themselves in the position of having to cover higher labor costs than were contemplated at the time they entered into the agreements. They’ll be contractually bound to maintain services despite increased costs that might not be covered by the existing arrangements.

Some exceptions

The new rule has some notable exceptions. The DOL has stated that teachers are exempt, as well as administrative personnel who help run higher education institutions. For example, academic counselors and advisors and intervention specialists aren’t subject to the FLSA’s overtime requirements if they’re paid at least the entrance salary for teachers at their institution. However, other types of nonprofits won’t be so lucky with their white-collar employees.

The DOL has also indicated that it won’t enforce the higher salary thresholds until March 17, 2019, for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. During the nonenforcement period, the DOL will engage in outreach and technical assistance efforts to these providers.

Act now

December 1 will be here before you know it. Consult with your financial advisor to determine your best course of action for minimizing the negative repercussions associated with the new salary-level test if the FLSA applies.

4 options for compliance with the new rules

Nonprofits have several options available for complying with the new overtime rules. Your options include:

Raising salaries. For employees who meet the duties test, have salary near the new salary level of $913 per week or $47,476 per year and regularly work overtime, you can increase their salaries to meet the new threshold and maintain their exempt status.

Paying overtime above a salary. You could continue to pay newly overtime-eligible employees a salary and pay overtime for any hours in excess of 40 in a week. 

Redistributing workloads. You can redistribute workloads to ensure appropriate staffing levels while minimizing overtime.

Adjusting base pay and paying overtime. You could adjust an employee’s earnings to reallocate it between regular rate of pay and overtime compensation. The revised pay may be on a salaried or hourly basis but must include overtime payment when the employee works more than 40 hours in a week.

The DOL doesn’t require or recommend any one approach.

 

The U.S. Department of Labor (DOL) has released a final rule that makes significant changes to the determination of which executive, administrative and professional employees — otherwise known as “white-collar workers” — are entitled to overtime pay under the Fair Labor Standards Act (FLSA). The rule will make it more difficult for employers to classify employees as exempt from overtime requirements. In fact, the DOL estimates that 4.1 million salaried workers will become eligible for overtime when they work more than 40 hours in a week.
 
The changes will have a tax impact as well: Employers’ payroll tax liability will increase as they pay overtime to more employees who work in excess of 40 hours a week or pay higher salaries to maintain overtime exemptions. 

Current requirements for white-collar exemptions

To qualify for a white-collar exemption from the overtime requirements under current federal law, an employee generally must satisfy three tests:
  1. Salary basis test. The employee is salaried, meaning he or she is paid a predetermined and fixed salary that’s not subject to reduction because of variations in the quality or quantity of work performed.
  2. Salary level test. The employee is paid at least $455 per week or $23,660 annually.
  3. Duties test. The employee primarily performs executive, administrative or professional duties.
Neither job title nor salary alone can justify an exemption — the employee’s specific job duties and earnings must also meet applicable requirements.
 
Certain employees (for example, generally doctors, teachers and lawyers) aren’t subject to either the salary basis or salary level tests. The current regulations also provide a relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $100,000 and at least $455 per week.

Significant changes under the final rule

The DOL issued a proposed rule in July 2015, revising the 2004 regulations, and received more than 270,000 comments in response.
 
The revisions in the final rule, which take effect December 1, 2016, mainly relate to the salary level test. The rule increases the salary threshold for exempt employees to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (currently the South) — $913 per week or $47,476 per year. 
 
In response to what the DOL described as “robust comments” from the business community, the final rule allows up to 10% of the salary threshold for non-HCE employees to be met by nondiscretionary bonuses, incentive pay and commissions, as long as these payments are made on at least a quarterly basis. Thus, an employee’s production or performance bonuses could push him or her over the threshold and into exempt status (assuming the other tests are satisfied).
 
The rule also updates the HCE threshold above which the relaxed duties test applies. It raises the level to the 90th percentile of full-time salaried workers nationally, or $134,004 per year. 
 
The final rule continues the requirement that HCEs receive at least the full standard salary amount — or $913 — per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. Such payments will, however, count toward the total annual compensation requirement.
 
The standard salary and HCE annual compensation levels will automatically update every three years to maintain the levels at the prescribed percentiles, beginning January 1, 2020. The DOL will post new salary levels 150 days before their effective date.

The duties test

The final rule makes no changes to the duties test. In the proposed rule, the DOL had sought comments regarding the effectiveness of the test at screening out workers who aren’t bona fide white-collar workers. 
 
But it determined that the new standard salary level and automatic updating will work with the duties test to distinguish between overtime-eligible workers and those who may be exempt. Moreover, as a result of the revised salary level, employers won’t need to consider the duties test as often — if a worker’s pay doesn’t satisfy the salary level test for exemption, the employer needn’t bother assessing the worker’s duties.

Compliance options

According to the DOL, employers have a range of options when it comes to complying with the changes to the salary level (although it doesn’t require or recommend any method). Options include:
 
Review and do nothing. After completing an internal review, you might choose to do nothing if your white-collar workers fall short of the new salary level but don’t ever work more than 40 hours per workweek.
 
Raising salaries. You may want to raise the salaries of employees who meet the duties test, have salary near the new salary level and regularly work overtime. Paying them at or above the salary threshold will maintain their exempt status.
 
Paying overtime above a salary. You could continue to pay employees a salary covering a fixed number of hours, which could include hours above 40. For example, you might:
And, of course, you might reorganize workload distributions or adjust employee schedules to redistribute work hours in excess of 40 across current staff. You could also hire additional employees to reduce or eliminate overtime hours worked by your current staff.

The big picture

As noted, the cost of the new overtime rules is more than just the increased compensation; it also includes additional payroll tax liability on that compensation, as well as administrative costs to comply. This is a complex and complicated issue; and we recommend you consult your employment advisor with questions or concerns.