The federal overtime provisions contained in the Fair Labor Standards Act (FLSA) are applicable to most organizations and differentiate between two employment classifications: nonexempt employees who are eligible for overtime pay and exempt employees who are not. These provisions mandate that, unless employees are exempt from overtime laws, they must be paid overtime at a rate of time and one-half their regular rate of pay for all hours worked over 40 in a workweek.
On September 24, 2019, the Department of Labor (DOL) announced a new Final Rule that provided a new minimum salary level threshold for exempt employees. This threshold will take effect on January 1, 2020, and when implemented, has been projected to affect the employment classifications of over one million employees in the United States. For those employers who have not reviewed the employment classifications of the jobs within their organization, there are three specific tests that must be applied to every job to determine whether an employee is exempt or nonexempt in order to be compliant with the FLSA.
First, there is a salary basis test that requires employers to pay exempt employees their full salary in any week that they perform work, regardless of the quantity or quality of the work that is performed. Accordingly, employees are required to be available to work as many hours as it takes to get their job done. However, this also means that an exempt employee may work for one hour on a particular day, but still must be paid their full salary, except in rare situations, for example under intermittent family and medical leave in accordance with the guidelines under the Family and Medical Leave Act (FMLA).
Second, there is a salary level test. The September 2019 Final Rule changed the minimum salary level threshold dramatically. Until December 31, 2019, employees under the executive, administrative, learned professional and creative professional exemption classifications must earn at least $455.00 per week or $23,660 per year, which is the current minimum salary level threshold for exempt employees. However, as of January 1, 2020, exempt employees must earn at least $684.00 per week or $35,568 per year in order to meet the minimum salary level threshold. It’s important to note that employers may use nondiscretionary bonuses, commissions, and incentive pay that is paid minimally once a year to fulfill up to ten-percent of the new minimum salary level threshold. The salary level threshold for computer professionals will not change and will continue to be not less than $684 per week, or not less than the minimum hourly wage of $27.63. Outside sales employees are the only category of exempt employees who are not under a minimum wage requirement, thus they are not subject to the salary level test.
Finally, a primary duties test compares the primary duties of an employee to certain criteria as defined by the FLSA. A job title is not enough to determine exemption status as job titles vary from organization to organization. Therefore, the FLSA has defined six major categories of employee exemptions and the criteria needed to meet each exemption. Some of the criteria listed below are tangible and objective, while others are subjective and must be evaluated closely in comparison with the employee’s primary duties. All employee duties considered to match the FLSA criteria must be sufficiently defendable if a DOL – Wage and Hour Division investigator were to perform an audit.
- Executive Exemption – Under the executive exemption, an employee’s primary duties include managing an organization or a recognized department of a larger organization. They regularly direct the work of two or more employees and have the authority to hire or fire employees, or provide weighted recommendations as to the hiring, firing, advancement, promotion, or other status change of employees.
- Administrative Exemption – Under the administrative exemption, an employee’s primary duties must be performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. The employee must also exercise discretion and independent judgment with respect to matters of significance. Since “matters of significance” may be a subjective term, the guidelines are defined thoroughly in the DOL – Wage and Hour Division Fact Sheet 17C.
- Professional Exemptions (Learned Professional/Creative Professional/Computer Professional and Outside Sales Professional) –
- The primary duties of a learned professional require advanced intellectual knowledge in the field of science or learning that normally has been acquired through a lengthy progression of educational achievements. Their duties must include a high level of consistent use of discretion and judgment.
- The primary duties of a creative professional refer to the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic endeavor.
- The computer professional may be employed as a computer systems analyst, computer programmer, software engineer, or other similar occupation that performs duties such as the application of systems, analysis techniques and procedures, designing, developing, documentation, analysis creation, testing or modification of computer systems or programs, or machine operating systems.
- The primary duties of an outside sales employee may include sales, exchanges, contracts to sell, obtaining contracts for services, or other services or products for which a client pays. The outside sales employee does not work regularly scheduled hours at their employer’s place of business as their work must regularly be outside of the office, normally visiting clients or potential clients.
Refer to e-CFR – Code of Regulations Title 5 – Part 551 – Pay Administration Under the Fair Labor Standards Act Subpart B for additional information on each exemption and exclusions.
Highly compensated employees are also exempt from the FLSAs overtime requirements due to their high salary level threshold, if they regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee (refer to the definitions above). The salary level threshold for highly compensated employees will be raised from $100,000 to $107,432 beginning January 1, 2020.
The DOL – Wage and Hour Division enforces compliance of employee classifications for overtime purposes through wage and hour investigations and may require employers to provide payment of any back wages or overtime due to an employee. Employers may also be required to pay the amounts that should have been withheld or paid on the employees’ behalf, e.g. taxes, benefit contributions, or the value of lost benefits. Changes in employment practices may be recommended including the removal of exemption status for all employees in a same job category in which a violation occurred. Employers who willfully or repeatedly violate the FLSA requirements are subject to civil monetary penalties for each individual violation and a second conviction of a violation may result in imprisonment.
Employers should also be aware of state and local laws which may supersede federal laws, if they provide employees a greater benefit than the federal law. Currently, there are multiple states that have overtime laws for employees who work over a specified number of hours in one day. Finally, employers should keep in mind that the purpose of the FLSA is to ensure that employees are compensated fairly and adequately. There is no law that states that employees who would qualify for an exempt status may not be paid on an hourly basis and receive compensation for overtime work if an employer chooses to honor their employees with that extra compensation.
For additional information on this topic, please contact us at www.newfocushr.com.
Written by: Kathi A. Walker, SHRM-SCP, PHR
Sr. HR Consultant
New Focus HR, LLC
Originally written: 10/26/2017