FAQs on Department of Labor’s New FLSA Overtime Rule

June 13, 2016

As we reported on May 18, 2016, the U.S. Department of Labor (DOL) published its new final rule regarding the overtime regulations of the federal Fair Labor Standards Act (FLSA). The following are key FAQs coming out of our June 8 webinar on the topic.

Q: Can you provide an executive-level summary of the new FLSA overtime requirements?

A: Effective Dec. 1, 2016, the salary threshold for most employees to potentially qualify as exempt from overtime (so long as they meet other FLSA exemption requirements) will more than double to $913 per week ($47,476 per year), and the salary threshold for “highly compensated” employees is increasing to $134,004 per year. In addition, the salary threshold amounts will be automatically updated by the DOL every three years based on certain economic benchmarks, with the first update scheduled to occur on Jan. 1, 2020. The bottom line of these changes is greater costs for employers — starting in Dec. 2016 and every three years thereafter — in the form of either: (a) pay increases needed to maintain the exempt status of certain employees; or (b) increased costs associated with overtime pay that will be owed to employees who move from exempt to non-exempt status.

Q: Is the method of calculating overtime changed under the new rule?

A: No. All of the detailed FLSA regulations that describe how to calculate an employee’s “regular rate of pay” for purposes of overtime, special provisions for certain types of wages earned, and the timing of payments remain exactly the same.

Q: Is paying an employee above the salary threshold test the only requirement needed for an employee to be deemed exempt from overtime under the FLSA?

A: No. Just because an employer pays an employee a salary does not necessarily mean she is entitled to overtime. As a general rule, for most (but not all) “white-collar” overtime exemptions under the FLSA: (1) an employee must be paid a predetermined and fixed salary not subject to reduction because of variations in the quality or quantity of work performed (i.e., the “salary basis test”); (2) the salary paid must meet a minimum specified amount (i.e., the “salary threshold test”); and (3) the employee’s duties must primarily involve certain exempt functions (e.g., executive, administrative or professional) as defined by DOL regulations (i.e., the “duties test”).

Q: Does an employee have to meet all three tests (i.e., salary basis, salary threshold and duties) to be deemed exempt from overtime under the FLSA, or can an employee be exempt if she meets only two of the three tests?

A: Generally speaking, to be exempt from overtime under the FLSA, an employee must meet the salary basis test, the salary threshold test, and the duties test. However, there are exceptions. For example, teachers may qualify as exempt from overtime under the “professional” exemption even if they do not meet the salary threshold test. In addition, under the new rule, an individual who earns over $134,004 per year may qualify as a “highly compensated employee” (HCE) under a relaxed version of the duties test. There are special rules regarding the salary threshold amount, what goes into that calculation, and the type of duties that must be performed in order to qualify for the HCE exemption. Employers should consult with counsel about particular positions and the rules that apply for determining exempt and non-exempt status.

Q: Can an employee be deemed exempt under the FLSA if he is not paid a salary (i.e., he doesn’t meet the “salary basis” test)?

A: It depends. For the vast majority of “white collar” exempt positions under the FLSA, the starting point for whether an employee can potentially be deemed exempt is that he or she must be paid a predetermined and fixed salary that does not go up or down based on the quality or quantity of work performed (i.e., not paid on an hourly basis). However, certain administrative, professional and computer employees may be paid on a “fee basis” rather than on a salary. Further, the salary requirements of the FLSA do not apply to individuals who qualify as outside salespersons under FLSA regulations. There are also special rules for certain retail employees paid on commissions where the regular salary requirements do not apply. Again, employers should consult with counsel about particular positions and the rules that apply for determining exempt status.

Q: Are employees who are covered by the FLSA Motor Carrier Act (MCA) exemption required to meet the salary threshold test under the new rule?

A: No. Nothing about the new rule changes the MCA exemption.

Q: If I switch my clerical employee (non-managerial/non-executive) from being paid hourly to salaried and increase his pay to above the new salary threshold test, is that enough to make him exempt?

A: Not necessarily. In addition to meeting the salary basis and salary threshold tests, the primary duties of the employee’s day-to-day work also would need to meet the “duties” test under the FLSA administrative exemption (or meet the tests of some other applicable exemption, depending on the job at issue). Or, stated another way, salary is merely a method of pay. Employees can be salaried exempt or salaried non-exempt depending on the particular exemptions that may or may not apply to their roles.

Q: If an employee is working in a part-time role, can her pay be annualized for purposes of determining whether the salary threshold test is met? For example, an exempt employee that works 30 hours per week?

A: No. Under both the old and new FLSA overtime rules, the salary threshold test must be met regardless of the number of hours worked per week in order for an individual to be deemed exempt for those “white collar” exemptions that include a salary threshold as part of the overall exempt test. Or, stated another way, where it applies, the minimum salary threshold is not pro-rated for part‐time work.

Q: Can I change exempt employees to non-exempt and pay them on an hourly basis, even if they meet all of the exemption tests?

A: Yes. Employers can always pay employees on an hourly basis if they wish to do so. However, once an organization begins paying employees using an hourly rate, it may also be required to pay them overtime consistent with the FLSA rules, to the extent the applicable FLSA exemption at issue has a “salary basis” requirement.

Q: Are there special carve-outs for small businesses or nonprofits that phase in the salary threshold increase, in stages over time?

A: Unfortunately, no. Although a phase-in was suggested as part of comments submitted to the DOL and by various lobbying groups, the new overtime salary threshold rule applies to all employers, large and small, for profit and nonprofit, beginning on Dec. 1, 2016, provided the “enterprise” (i.e., the employer) and/or the individual employees at issue are covered by the FLSA.

Q: Are there other special provisions under the new overtime rule that apply to small businesses and nonprofits?

A: No. However, under the new rule, just as under the old rule, certain small businesses or nonprofits may not be covered by the FLSA. One set of rules involves what is called “enterprise coverage,” which addresses whether the FLSA applies to an organization as a whole. Another set of rules involves what is called “individual coverage,” which addresses whether the FLSA applies to specific employees regardless of whether the entity is a covered enterprise.

Generally speaking, to be a covered “enterprise” under the FLSA, an entity must have over $500,000 in commercial activity annually. However, for some nonprofits, certain charitable work may be excluded from the definition of “commercial activity,” such that any income derived from such work may not count toward the $500,000 enterprise coverage amount. Also, some small, for-profit employers may not do enough business to reach the $500,000 amount required for enterprise coverage.

Having said this, even if an employer is outside of the FLSA’s enterprise coverage rule, it may still have to comply with the FLSA for particular employees under the separate individual coverage test. That test examines an employee’s duties and the extent to which such activities involve interstate commerce. “Interstate commerce” is defined broadly by the DOL to include such activities as sending and receiving email, Internet use, processing cross-state credit card transactions, etc.

Regardless of how these coverage rules apply to a given employer, the big takeaway is that the FLSA coverage requirements and exceptions have not changed with the adoption of the new overtime rule. What has changed is the increased cost to employers for meeting the exempt salary threshold test. Because of this, looking at FLSA coverage issues becomes much more important, especially for employers on a tight budget.

Q: Are there special overtime rules that apply to churches or other religious organizations?

A: No. There are no special provisions under either the old or new FLSA rules with respect to the salary threshold test requirement. But, there are special ways that the FLSA coverage regulations apply to churches and other religious organizations. On a broad level, most (but not all) churches and other religious organizations are exempt from FLSA “enterprise” coverage, because they are deemed to be “not in substantial competition with other businesses” (unless operated in conjunction with a hospital, residential care facility, a school or a commercial enterprise). However, certain employees may still be “individually” covered if engaged in interstate commerce (which, as described above, has a very broad scope). Because of this, rather than make pay distinctions between different groups of hourly employees, many religious institutions choose to pay overtime to all non-exempt employees, regardless of whether an employee meets the “individual” FLSA coverage requirements.

Q: Is it smart to move an employee who is currently salaried exempt to hourly non-exempt starting in December 2016?

A: Whether a change makes sense will depend on various factors. These include: (a) the number of hours the employee typically works, (b) how close to the new salary threshold the employee’s salary is at present, and (c) the impact of other overtime rules (e.g., travel time, off-the-clock duties, training) on potential overtime calculations, all of which may impact an employee’s total compensation if he or she were changed from exempt to non-exempt. There are also non-economic considerations, such as whether changing positions to hourly or salaried non-exempt will impact employee morale, recruiting or retention.

Q: Is there any type of required notice that employers must provide to impacted employees if moving them from salaried exempt to hourly or salaried non-exempt? If so, what is the timing of the notice?

A: Not under the FLSA, but there may be under state law. Most states have specific “wage and hour” laws governing what notice employers must provide to employees about their pay. This includes requirements regarding the content, form and timing of notices. If uncertain about the wage change rules that apply for a given state (or which state rules apply to which employees depending on where they are sited and/or primarily work), consult with counsel.

Q: One of the executives where I work believes the new overtime rule will be voted out of law before Dec. 1 and that it won’t go into effect. Is that possible?

A: While anything is possible, it is highly unlikely that the new FLSA overtime rule will be blocked by legislative action before it goes into effect on Dec. 1, 2016. Moreover, even following the presidential election, it is unlikely that the new rule will be unwound or that it would happen any time soon. We recommend that all employers become familiar with the new rule and be prepared to comply as of Dec. 1.

For additional information on the new FLSA overtime regulations and how they will affect your business, please contact the authors, your McGuireWoods contact, or a member of the firm’s labor and employment group.