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Changes to the Final Rule affect overtime pay

September 19, 2016

Final Rule in effect December 1, 2016

By Alan C. Blanco, Esquire

The Fair Labor Standards Act (FLSA) establishes a minimum wage and requires payment of mandatory overtime for covered employees who work more than 40 hours per week. However, certain employees are exempt from the wage and hours and/or overtime payment provisions of the FLSA. Therefore, employees are divided into two general classes: nonexempt employees, who are paid on an hourly basis and receive overtime payment at premium rates, and exempt employees. Exempt employees are generally paid on a salary basis and perform exempt duties. On May 18, 2016, President Obama and Secretary Perez announced the publication of the Department of Labor’s Final Rule updating the overtime regulations.

Key Provisions of the Final Rule

According to the Department of Labor, the Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:

  • Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, effective December 1, 2016 ($913 per week; $47,476 annually for a full-year worker);
  • Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, effective December 1, 2016 ($134,004); and
  • Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

As stated previously, to qualify for the white-collar exemption, employees must meet both a salary test (i.e. they must be paid on a salary basis) and a duties test (i.e. they must perform exempt duties). The Department of Labor has estimated that 4.2 million white collar workers may become newly eligible for overtime protection at the onset of the new rules. The Department of Labor predicts that many of these workers will either work fewer hours, or will receive additional compensation when they work overtime, or will receive a salary increase to remain exempt.

The Final Rule does not make any changes to the “Duties Test.” The substantive duties test focuses on the specific job duties of the employees, requiring that the employee’s primary duties are exempt in nature. There are certain criteria which must be met by executive, administrative and professional employees to qualify them as exempt employees.

An executive employee’s primary duties are to manage all or part of a business, exercise discretionary powers, and direct the work of two or more employees. An executive has the authority to hire, fire, promote or change the status of other employees or the executive’s opinion is given great weight in those matters.

An administrative employee’s duties consist of either office work or non-manual work which is “directly related to management policies or general business operations.” The administrative employee must exercise discretion and independent judgment, work under only general supervision, and assist someone employed in an executive or administrative capacity. A distinction must be made between administrative employees, whose duties involve special knowledge, experience and training to actually run the business, and non-exempt employees who perform administrative tasks to aid in day-to-day operations.

The duties undertaken by professional employees require advanced education or an extended course of study beyond general academic education. Professional employees produce work which is intellectual, creative, and heavily dependent on talent, invention, or imagination. Examples of professional employees include doctors, attorneys, dentists, teachers and professors, registered nurses, scientists, musicians, painters, and actors.

Don’t let a job title throw you. The focus is on the actual job duties of the employee, not the title.

The new rules are in effect December 1, 2016. You may consult the Department of Labor’s website or contact us if you have questions.

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