And what they mean for your business . . . New FLSA Salary Rules And what they mean for your business . . .

“White Collar” Exemption Increase to the minimum salary requirement or threshold for the overtime exemption applicable to executive, administrative and professional employees

New minimum weekly salary Now Starting December 1st At least $455 per week $23,660 annually No automatic increases At least $913 per week $47,476 annually Amount resets on January 1, 2020 and every 3 years thereafter

Highly Compensated Employee Exception Threshold to qualify for this exemption increased from $100,000 annually to $134,004 annually Has to also customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee Probably not of a lot of impact because most employees who are paid this much already satisfy all the duties tests for executive, administrative or professional

Minimum Salary Test only applies to White Collar Exemptions Dozens of other exemptions from overtime rules that are not impacted one iota by these changes Teachers, elected officials, employees of seasonal amusement of recreational facilities, lawyers and doctors, small police departments, etc. None of these exemptions are effected by the new rules e.g. new lawyer hired at my firm at $40,000 would still not be eligible for overtime because lawyers are exempt from overtime under different regulations Minimum Salary Test only applies to White Collar Exemptions Executive Administrative Professionals

Minimum Salary Test only applies to White Collar Exemptions By the same token . . . Employee must satisfy the duties test and the salary test to qualify for the overtime exception A custodian or employee working on the assembly line whose paid an annual salary of $60,000 is still eligible for overtime Salary test is satisfied . . . But the duties test isn’t Minimum Salary Test only applies to White Collar Exemptions Executive Administrative Professionals

Executive Exemption – Duties Test Primary duty = managing the enterprise in which the employee is employed Or managing a recognized department or subdivision of the enterprise Must regularly direct the work of at least two or more other full-time employees or their equivalent Oversees 1 full time and two part time employees Must have the authority to hire or fire other employees Or the employee’s suggestions and recommendations on hiring, firing, promotions, etc. must be given particular weight

Administrative Exemption – Duties Test Primary duty = performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers Areas related to management or business operations include: advertising, safety, human resources, accounting, IT Must include the exercise of discretion and independent judgment with respect to matters of significance

Professional Exemption – Duties Test Learned Professionals Primary duty = performance of work requiring advanced knowledge Work that is primarily intellectual in nature, requiring consistent exercise of discretion and judgment Advanced knowledge must be in field of science or learning with recognized professional status Law, theology, architecture, pharmacy, chemistry As opposed to mechanical arts or skilled trades (jet engine mechanic, HVAC) Advanced knowledge acquired through prolonged course of specialized intellectual instruction as prerequisite to entering the profession

New minimum weekly salary Now Starting December 1st At least $455 per week $23,660 annually No automatic increases At least $913 per week $47,476 annually Amount resets on January 1, 2020 and every 3 years thereafter

Where did they get these numbers from?

History of the “Salary Test” FLSA originally adopted in 1938 (part of FDR’s New Deal) “Salary Test” for Executive, Administrative and Professionals has been part of regulations since adoption These changes mark the 8th time since 1938 that the salary levels have been adjusted Most recent change was in 2004 and also made lots of other changes including to the standards for the “duties tests” Prior to 2004, the last time salary threshold was changed was in 1975

Setting the new level Original rule proposed to set the amount at $970 per week ($50,440 annually) 40th percentile of full-time salaried workers nationally Lots of criticism and comment $970 per week in Terre Haute is different than $970 a week in San Francisco or even in Indianapolis Final Regulation reduced amount to $913 per week ($47,476 annually) 40th percentile of full-time salaried workers in the southern U.S. Lowest wage region in the country Projected to affect 4.2 million workers nationwide; 86,000 in Indiana

Salary requirements What is the meaning of “salary”?

Salary rules Employee must regularly receive a predetermined amount of compensation each pay period Compensation can’t be reduced because of variations in the quality or quantity of work performed Generally, employee must receive full salary for any week in which the employee performs any work Exceptions when deductions from salary are allowed Absence from work for full day(s) for reasons or than sickness or disability Unpaid disciplinary suspensions To offset amounts received as payment for jury fees, witness fees or military pay

Following Salary Rules is Important Effect of an Improper Deduction Employer risks loses the exemption for the employee or all employees at same classification or working for same manager Potentially significant impact Some allowance for “isolated” or “inadvertent” deductions “Safe Harbor” exists and exemption won’t be lost if: Employer has “clearly communicated” policy prohibiting improper deductions, including a complaint procedure Reimburses employees for improper deductions Makes a good faith effort to prevent mistakes in the future

How to comply with new rules Employer’s options for responding to new salary levels

Raise salaries Marketing director meets duties test for administrative exemption but only makes $45,000 a year in salary Increase her salary to at least $47,476 per year (starting December 1st) Maintains current exemption Will increase employer’s costs Easier to change for employee making $45,000 than employee making $35,000

Strictly limit to 40 hours per week Marketing Director making $35,000 per year Set a fixed work schedule of 40 hours or less with no overtime without express authorization Costs to employer should stay same (maybe some increase for authorized overtime) But may result in less work production from employee And limiting hours can be difficult for many positions Need to record time of employee because he/she is no longer exempt from overtime

Keep salary same but pay overtime Continue to pay employee his/her salary, but pay overtime if they work over 40 hours Employees can receive salary and still be paid overtime For every hour worked over 40, employee is paid 1.5 times his/her hourly rate (weekly salary divided by 40 hours) Employee paid $800 per week; hourly rate is $20 per hour; overtime rate $30 per hour 41 hour work week = $830 in pay to employee But . . . 38 hour week still means $800 in salary Probably good if you have few employees who work few overtime hours But could also be very expensive

Convert salaried employees to hourly pay Employee making $800 weekly salary is changed to a $20 per hour employee If he/she works 41 hours, earn $830 But work 38 hours = $760 in pay Costs of this option would be less to employer if employee sometimes works less than 40 hours per week Employees may not like Paychecks could be less some weeks Perceived demotion

Reduce employee’s salary or hourly rates If employee is expected to regularly work a fairly predictable number of overtime hours . . . Salary could be reduced (or hourly rate adjusted) so that, with overtime, employee’s compensation stays similar to its current level Employee currently making $40,000 salary for 50 hours a week Salary reduced from $769.23 per week to $559.60 per week ($22,384 annual) With overtime, at 50 hours per week, employee will still make $40k per year Could also set employee’s hourly pay to $13.99 per hour Math is hard, predictions could be off, employee moral

Fixed Salary for over 40 hours Under some circumstances, not required to pay 1.5 times hourly rate for over 40 hours Employer designates in writing that employee’s salary $769.23 per week ($40,000) annually, is intended to be for 50 hours per week For hours 41-50 employee does receive extra compensation . . . But only ½ time rate ($7.69 per hour) $769.23/50 =$15.38; $15.38/2 = $7.69 Because salary is intended to cover employee’s “flat rate” to 50 hours The 1 in the 1.5 is already covered, so all that is owed is the .5 If employee works over 50 hours, then he/she owed 1.5 regular rate ($23.07) $769.23/50 = $15.38; $15.38 x 1.5 = $23.07 If employee works 25 hours, still receive regular salary

Fluctuating Work Week Employee receives fixed salary per week regardless of hours worked If employee works over 40 hours, he/she gets ½ time for overtime hours ½ time rate is based on number of hours employee worked that week Employee is paid weekly salary of $800 and works 60 hours Overtime rate is $800/60 = $13.33 x .5 = $6.66 Employee’s pay for week is calculated by: Take weekly salary $800 Add 20 hours x $6.66 ($133.20) = $933.20 Complicated because rate changes weekly based on hours worked Should be confirmed in written understanding with employee

More Info? https://www.dol.gov/whd/overtime/final2016/ Scott Craig scraig@coxlaw.net (812) 232-6003