1. UNDERSTANDING THE NEW OVERTIME RULE AND STRATEGIES FOR SUCCESS presented by Robert D. Zaruta, Esq. Knox McLaughlin Gornall & Sennett, P.C.

2. FAIR LABOR STANDARDS ACT OF 1938 ●Originated in President Roosevelt’s “New Deal” ●Purposes – Incentivize the creation of new jobs – Alleviate oppressive work conditions such as long work days/weeks for minimal salaries 2

3. Key Requirements of the FLSA in 1938: – Set minimum hourly wage at $0.25 – Set standard work week – Regulated the use of child labor – Required employers to maintain records of hours worked and wages paid. – Required overtime pay unless exempt 3

4. The FLSA is enforced by the U.S. Department of Labor’s Wage and Hour Division, and covers more than 135 million workers at more than 7.3 million establishments nationwide. 4

5. FLSA COVERAGE ●Enterprise Coverage ●Individual Coverage 5

6. Enterprise Coverage ●Employees who work for certain business (or “enterprises”) are covered by the FLSA. These enterprises, which must have at least two employees are: 1.Those that have an annual dollar volume of sales or business done of at least $500,000; or 2.hospitals, businesses providing medical or nursing care for residents, schools, preschools and government agencies. These employees are covered by the FLSA regardless of the amount of gross volume or sales or business done 6

7. Enterprise Coverage – cont ●The FLSA generally applies to employees employed by a business with an annual gross volume of sales made or business done of at least $500,000. 7

8. How Does Enterprise Coverage Apply to Non-Profits? ●Non-profit organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities that result in sales made or business done, such as operating a gift shop. ●In determining whether a non-profit is a covered enterprise, the Wage and Hour Division will consider only activities performed for a business purpose. ●Charitable, religious, educational, or similar activities of organizations operated on a non-profit basis where such activities are not in substantial competition with other businesses do not result in the organizations being considered covered enterprises. ●For a non-profit organization, enterprise coverage applies only to the activities performed for a business purpose. It does not extend to the organization’s charitable activities. 8

9. ●$500,000 Threshold – Income from contributions, membership fees, dues (except any part of which represents the value of a benefit, other than of token value, received by the payer), and donations, used in furtherance of charitable activities, are not considered in determining whether an organization has reached the $500,000 threshold for enterprise coverage. 9

10. Example ●A non-profit animal shelter provides free veterinary care, adoption services and shelter for homeless animals (charitable activities). In addition, the shelter provides veterinary care for a fee to customers (commercial activities). If the revenue generated from the organization’s commercial activities is at least $500,000 in a year, the employees engaged in the commercial activities are protected by the FLSA on an enterprise basis. Employees of the organization’s charitable activities are not covered on an enterprise basis since those activities do not have a business purpose. 10

11. Individual Coverage ●Even if an employer is not covered on an enterprise- wide basis, employees may be individually covered by the FLSA if their work regularly involves them in interstate commerce (between states). ●The FLSA covers individual workers who are engaged in interstate commerce or in the production of goods for interstate commerce, or in any closely- related process or occupation directly essential to such production. 11

12. Activities that may result in individual FLSA coverage: – Making/receiving interstate telephone calls – Shipping materials to another state – Transporting persons or property to another state – Sending e-mails to individuals in another state 12

13. Insubstantial Amount of Time – The Wage and Hour Division will not assert that an employee is engaged in interstate commerce or in the production of goods for interstate commerce when there are only isolated occasions of spending insubstantial amounts of time engaging in such activity. 13

14. FLSA and Non-Profits ●Neither the FLSA nor the Department’s regulations provide an exemption from overtime requirements for non-profit organizations. ●Thus, the Final Rule may impact non-profit organizations having an annual dollar volume of sales or business done of at least $500,000, or those with employees individually covered by the FLSA. ●Determining whether the FLSA applies to a non- profit sometimes requires a detailed, fact-based review of the organization and its employees. 14

15. White Collar Exemptions ●Section 13(a)(1) of the FLSA provides an exemption from both the minimum wage and overtime pay for employees employed as bona fide executive, administrative or professional employees. ●The FLSA also exempts certain employees engaged in outside sales or computer services. ●To qualify for the exemption, employee generally must meet certain tests regarding job duties and be paid on a salary basis of a minimum amount per week. 15

16. Job Duties Test ●Job titles do not determine exempt status. ●Contracts stating that the employee is exempt are not dispositive ●The Wage and Hour Division looks closely at what the employee actually does. 16

17. Executive Exemption To qualify for the executive employee exemption, all of the following must be met: – The employee must be compensated on a salary basis at a minimum weekly rate; – The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; – The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and – The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. 17

18. Administrative Exemption To qualify for the administrative employee exemption, all of the following tests must be met: – The employee must be compensated on a salary basis at a minimum weekly rate; – The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and – The employee’s primary duty includes the exercise of discretion and independent 18

19. Professional Exemption To qualify for the learned professional employee exemption, all of the following tests must be met: – The employee must be compensated on a salary basis at a minimum weekly rate; – The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; – The advanced knowledge must be in a field of science or learning; and – The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. 19

20. To qualify for the creative professional employee exemption, all of the following tests must be met: – The employee must be compensated on a salary basis at a minimum weekly rate; – The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. 20

21. Computer Employee Exemption ●This is not an exemption under Pennsylvania Wage and Hour law! ●To qualify for the computer employee exemption, the following test must be met: – The employee must be compensated either on a salary or fee basis at a minimum weekly rate, or if compensated hourly, at a rate not less than $27.63/hour – The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below: 21

22. – The employee’s primary duty must consist of: The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or A combination of the aforementioned duties, the performance of which requires the same level of skills. 22

23. Outside Sales Exemption ●To qualify for the outside sales employee exemption, all of the following tests must be met: – The employee’s primary duty must be making sales, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and – The employee must be customarily and regularly engaged away from the employer’s place of business. – In Pennsylvania, outside salesman is defined as an employee who is customarily and regularly engaged more than 80% of work time away from the employer’s place of business. 23

24. Highly Compensated Employee Exemption ●This is not an exemption under Pennsylvania Wage and Hour law! 24

25. Salary Basis Test ●To qualify as an exempt employee under the “white collar” exemptions, an employee must not only meet the duties test and the salary level test, but he or she must also be paid on a salary basis ●An employee is considered to be paid on a “salary basis” if the employee “regularly received each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 25

26. ●An employee is not paid on a salary basis if the employee’s wages are subject to improper deductions. Thus, paying an employee a salary alone will not avoid statutory minimum wage and overtime requirements where the employee is not paid on a salary basis. ●Subject to certain exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. ●Exempt employees do not need to be paid for any workweek in which they perform no work. 26

27. Circumstances in Which an Employer May Make Deductions From Pay While Still Maintaining Salary Basis – Absence from work for one or more full days for personal reasons other than sickness or disability – Absence of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice or providing compensation for salary lost due to illness – To offset amounts employees receive as jury to witness fees, or for military pay 27

28. – For penalties imposed in good faith for infractions of safety rules of major significance – For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. – During the initial or terminal week of employment – For absence due to unpaid FMLA leave. 28

29. Effect of Improper Deductions ●The employer will lose the exemption if it has an “actual practice” of making improper deductions from salary – This means the employer may have to pay all unpaid overtime going back two years. As well as liquidated damages and attorneys fees. 29

30. Safe Harbor ●If an employer (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future, the employer will not lose the exemption. 30

31. Department of Labor’s Final Rule ●In April of 2015, President Obama directed the Secretary of Labor and DOL to reform the current white collar exemptions to increase the number of persons entitled to overtime under the FLSA. 31

32. ●In July, 2015, the DOL published notice of proposed rulemaking updating the overtime exemptions. The proposed rules would significantly increase the minimum salary threshold required to qualify for the “white collar” exemptions. 32

33. ●On May 18, 2016, the Department announced that it will publish a Final Rule to update the regulations. The full text of the Final Rule will be available at the Federal Register Site. 33

34. Changes to the Salary Level ●The Final Rule increases the salary level required for the executive, administrative and professional (“white collar”) exemptions. ●Beginning on December 1, 2016, the change will raise the salary level of exempt status from the current $455/week ($23,660 per year) to a new level of $913/week ($47,476 per year). 34

35. ●The Final Rule also raised the compensation level for highly compensated employees from the current $100,000/year to $134,004/year. However, Pennsylvania does not have a highly compensated employee exemption. ●The Final Rule also establishes a mechanism for automatically updating the salary and compensation levels every three years, with the first update to take place in 2020 35

36. Final Rule Impact on Duties Test? ●Although changes to the duties test were initially discussed, the Final Rule does not make any changes to the duties test. 36

37. Nondiscretionary Bonuses and Incentive Payments ●The DOL is changing the regulations to allow nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement. Such bonuses include, for example, nondiscretionary incentive bonuses tied to productivity or profitability (e.g. a bonus based on the specified percentage of the profits generated by a business in the prior quarter). ●For employers to credit nondiscretionary bonuses and incentive payments (including commissions) toward a portion of the standard salary level test, such payments must be paid on a quarterly or more frequent basis. 37

38. ●Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees in induce them to work more efficiently or to remain with the company. Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. ●By contrast, discretionary bonuses are those for which the decision to award the bonus and the payment amount is at the employer’s sole discretion and not in accordance with any preannounced standards. An example would be an unannounced bonus or spontaneous reward for a specific act. 38

39. Catch-up Payment ●If an exempt employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain their exempt status, the DOL will allow an employer to make a “catch-up” payment at the end of the quarter. ●The employer has one pay period to make up for the shortfall (up to 10% of the standard salary level for the preceding 13 week period). ●Any such catch-up payment will count only toward the prior quarter’s salary amount and not toward the salary amount in the quarter in which it was paid. ●If the employer chooses not to make the catch-up payment, the exempt status would be destroyed and the employee would be entitled to overtime pay for any overtime hours worked during the quarter. 39

40. Options for Compliance with Final Rule 1.No Changes Needed Because Not Covered By FLSA – Employers should evaluate whether their organization is covered under the FLSA as an enterprise and whether individuals are covered. This can be a detailed process but can prevent the stress of complying with the FLSA 40

41. 2.No Changes to Pay or Hours Necessary – Employers should evaluate all categories of white collar employees to determine which employees do not work more than 40 hours per workweek. The Final Rule will have no impact on these employees’ pay because they do not work any overtime even though they will be overtime-protected. 41

42. ●Example – An officer manager performs the duties of a bona fide administrator and is paid a fixed salary of $42,000 per year. The manager regular works 9-5, Monday through Friday. With the implementation of the Final Rule, this employee is no longer exempt because his salary is under the new threshold. Nevertheless, the Final Rule has no impact on the manager’s pay, because the manager does not work more than 40 hours in a given week. The office can continue to pay him a fixed salary of $42,000 a year. However, it is important to take into consideration any work the employee may perform outside of work, such as sending e-mail, making phone calls, etc. This could push the employee over 40 hours per week. 42

43. 3.Raise Salaries – Employers may choose to raise the salaries of employees. 4.Pay Overtime Above the Salary – Employers also can continue to pay employees a salary and pay overtime for hours in excess of 40 per week. Although the FLSA requires employers to keep records of how many hours overtime-eligible employees work, the law does not require that overtime-eligible works be paid on an hourly basis. 43

44. – An employer might pay employees a salary for the first 40 hours of the work week, and then pay overtime for any hours over 40. Employers may choose to do this, for example, for employees who work 40 hours per week and do not frequently work overtime, or who do not consistently work the same amount of overtime. 44

45. – Employers also have the option of paying a straight time salary for more than 40 hours in a week for employees who regularly work more than 40 hours, and paying overtime in addition to the salary. Using this method, the employer will only be required to pay an additional half time overtime premium for overtime hours already included within the salary, and time and a half for hours beyond those included in the salary. 45

46. – Example – An HR manager at an electrical supply company earns a fixed salary of $44,200 per year ($850/week) for a 50 hour workweek. The salary does not include the overtime premium. Because the salary is for 50 hours per week, the employee’s regular rate is $17/hour ($850/50). In a normal 50 hour workweek, the employer would pay the employee the additional overtime premium for the 10 hours of overtime ($8.50/hour). If the employee worked more than 50 hours in a week, the employer would also owe overtime compensation at time and a half the regular rate ($17 x. 1.5) for hours beyond 50 (because the salary does not cover any payment for those hours). 46

47. – It is also possible for an employer and employee to agree to a fixed salary for a work week or more than 40 hours, in which the salary includes overtime compensation under certain conditions. This method of paying overtime, therefore, might be the most helpful for employees who consistently work the same amount of overtime every week. 47

48. 5.Reduce employees pay and factor in likely overtime – Example – Assume a supervisor who satisfies the duties test for the executive exemption earns $37,000 per year ($711.54 per week). The supervisor regularly works 45 hours per week. The employer may choose to instead pay the employee an hourly rate of $15/hour and pay time and one-half for the 5 overtime hours worked each week: $600 (40 hours x $15/hour) + $112.50 (5 OT hours x. $15 x 1.5) = $712.50 per week 48

49. 6.Accept the loss of exempt status and implement strict no overtime rules – Should have a clearly written policy – Should require employees to submit time sheets which they verify and acknowledge are accurate. – Should consider using software that cuts off employee access to e-mail during non-work hours 49

50. Make Sure Your House Is In Order ●Now is the time to get ready for these changes and determine how your organization is going to respond. ●Ensure accuracy of employees who are considered salaried, exempt. ●Cost considerations: increase salaries or pay overtime ●If status changes to non-exempt, consider your options. 50

51. Thank You! 51 Knox McLaughlin Gornall & Sennett, P.C. Robert D. Zaruta, Esq. rzaruta@kmgslaw.com (814) 459-2800

52. ●These materials should not be considered as, or as a substitute for, legal advice and they are not intended nor do they create an attorney-client relationship. Because the materials included here are general, they may not apply to your individual legal or factual circumstances. You should not take (or refrain from taking) any action based on the information you obtain from these materials without first obtaining professional counsel. The views expressed do not necessarily reflect those of the firm, its lawyers, or clients. Disclaimer 52