FLSA Changes Laura K. Hensley Boyce Law Firm, LLP 300 S. Main Avenue Sioux Falls, SD 57104

March 13, 2014 – Presidential Memorandum signed Meant to identify salaried workers entitled to overtime pay Exempt if in a bona fide executive, administrative, or professional capacity Known as the “white collar” or “EAP” exemption Effective December 1, 2016

Who Qualifies?

To qualify, a “white collar” employee generally must: Be salaried – the “salary basis test” Be paid more than specified salary level, $913/week or $47,476/year – the “salary level test” Primarily perform executive, administrative, or professional duties – the “duties test”

Certain employees are not subject to either the salary basis or salary level tests: i.e. doctors, teachers, lawyers The Department’s regulations also provide an exemption for certain highly compensated employees (“HCE”) earning above $134,004 (under the Final Rule) and satisfy a minimal duties test.

Duties Test Did Not Change the Definition of Executive, Administrative and Professional Employee

Exempt Executive Job Duties: Regularly supervise two or more employees; Has management as the primary duty of the position; and Has some genuine input into the job status of other employees.

Exempt Professional Job Duties: Employees who perform work requiring “advanced knowledge” similar to that historically associated with the traditional learned professions; and Predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment.

Exempt Administrative Job Duties: This is the most elusive and imprecisely defined job The Regulations provide that these jobs are: Office or non-manual work, which is directly related to management or general business operations or the employer or the employer’s customers, and a primary component of which involves the exercise of independent judgment and discretion about matters of significance

Designed for relatively high-level employees whose main job is to “keep the business running.” Has to be office or non-manual Examples: Human resource employees, payroll and finance, records maintenance, accounting and tax, marketing and advertising, quality control, public relations, legal and regulatory compliance, and some computer-related jobs

Outside Sales Exemption: Primary duty of making sales or obtaining orders or contracts for services Partakes in customary and regular engagements away from the employer’s place of business (no minimum salary requirements)

An exempt employee virtually has no rights at all under the FLSA overtime rules For any employee who is properly classified as exempt pursuant to the outside sales exemption, no change is required under the new rule, regardless of employee compensation

The Overall Impact

Rule extends overtime protections to 4 Rule extends overtime protections to 4.2 million workers who are not currently eligible. Workers who do not earn at least $47,476/year ($913/week) will be paid overtime, even if they’re classified as a manager or professional.

Employers must comply with new regulations by December 1, 2016 The Department will increase the salary threshold every three years, rather than annually as initially proposed The salary threshold is expected to rise to more than $51,000 with its first update on January 1, 2020. Employers must comply with new regulations by December 1, 2016

Final Rule increases the standard salary level from $455/week ($23,660/year) to $913/week ($47,476/year). Employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy 10% of the standard salary level, when payments are made on a quarterly or more frequent basis.

29 CFR §541.203 states that: “Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.”

How Do the Current Regulations, Proposed Rule and Final Rule Compare?

Current regulations (2004 until effective date of Final Rule, 2016) NPRM Final Rule Salary Level $455 weekly $970 weekly (if finalized as proposed) 40th percentile of full-time salaried workers nationally. $913 weekly 40th percentile of full-time salaried workers in the lowest-wage Census region (currently the South) HCE Total Annual Compensation Level $100,000 annually $122,148 90th percentile of full-time salaried workers nationally $134,004 90th percentile of full-time salaried workers nationally Automatic Adjusting None Annually, with requests for comment on a CPI or percentile basis Every 3 years, maintaining the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage Census region, and the HCE total annual compensation level at the 90th percentile of full-time salaried workers nationally.

Current regulations (2004 until effective date of Final Rule, 2016) NPRM Final Rule Bonuses No provision to count nondiscretionary bonuses and commissions toward the standard salary level Request for comment on counting nondiscretionary bonuses and commissions toward standard salary level Up to 10% of standard salary level can come from non-discretionary bonuses, incentive payments, and commissions, paid at least quarterly. Standard Duties Test See WHD Fact Sheet #17A for a description of EAP duties. No specific changes proposed to the standard duties test. Request for comment on whether the duties tests are working as intended. No changes to the standard duties test.

Important Things to Consider

The Department left unanswered whether employers relying on this 10% allowance for other compensation must “true up” employees upon termination, or risk the loss of the exemption for the “underpaid” weeks in the corresponding quarter. 

The need for documentation and record keeping becomes even more important when it comes to wages, hours worked, etc.

Tracking will likely require a huge overhaul of an HR position and payroll systems Logging in and out of work New programs where mobile devices log hours and set specific alerts that notify when certain conditions (such as approaching overtime) require attention

Many systems automatically deduct lunch breaks from an employee’s compensation. Employee may work through lunch creating a potential risk for a future claim Avoid issue by requiring employees to log out and in for each break Precision in time tracking — rather than assumptions — should help minimize overall risk.

The impact will greatly effect the tracking of employees that are currently exempt and will now become eligible Example: No longer using exempt positions for emergency on-call or other situations?

Having exempt and non-exempt individuals in the same class of work will likely create an issue within the organization Entry-level individuals who are non-exempt versus managers that are exempt? Side-by-side employees conducting the same work being treated differently given their relative pay

Administrative Leave/Extra Vacation: Revamping policies to make it clear that once an employee loses their exemption status the additional leave will also be lost

Impact to Employers/Concerns for Implementation

May result in reduced salaries to offset the change Increased labor costs Employees not granted overtime before now are entitled to it May result in reduced salaries to offset the change No time to adjust given the substantial increase in a short period of time Possibly fewer “white collar” jobs created

Impact on Government Employers

Lower level manager in places like public works departments are not considered non-exempt and subject to overtime requirements Impose limitations on employees working overtime Changes in the management or staffing and possible reduction in hourly rates could offset any potential overtime that may be incurred – which would result in no change, defeating the intent of the rule

Duties Test

The Final Rule is not changing any of the existing job duty requirements to qualify for exemption. The Department expects that the standard salary level set in this Final Rule and automatic updating will work effectively with the duties test to distinguish between overtime-eligible workers and those who may be exempt.

As a result of the change to the salary level, the number of workers for whom employers must apply the “duties test” to determine exempt status is reduced, thus simplifying the exemption. Both the standard “duties test” and the “HCE” duties test remain unchanged.

Any questions?

Disclaimer: This presentation is a general discussion about the legal parameters of the FLSA and its changes and should not be construed as legal advice. No action should be taken on the basis of this presentation without consulting an attorney.