On May 18, 2016, the Department of Labor (DOL) announced the long awaited changes to the Fair Labor Standards Act (FLSA) regulations that significantly affect who may continue to be classified as exempt under the executive, administrative and professional exemptions or who may be entitled to overtime compensation based on a new “salary test.”
Under federal law, in order for an employee to qualify for the “white collar exemption” from overtime, the employee must satisfy:
- the “salary basis test,” which requires the employee to be paid a fixed weekly salary;
- the “salary level test,” which sets a minimum mandatory salary threshold; and
- the “duties test,” which requires that the employee primarily perform executive, administrative, or professional duties as defined by the FLSA. (There have been no changes to the “duties test” under the new DOL regulations or state law).
Under existing federal regulations, the required salary level is $455 per week or $23,660 annually. Under the new rules, the minimum salary level will more than double to $913 per week ( $47,476 per year).
Employees whose salary falls below the new threshold will no longer qualify for the white collar exemption and would be entitled to overtime compensation for hours worked in excess of 40 per week. (Remember, the California overtime standard remains at 8 hours per day OR 40 hours per week).
Exceptions
The federal salary test does not apply to certain professionals: teachers (if their primary duty is teaching in an educational establishment), licensed lawyers and doctors (bona fide practitioners of law or medicine). Under federal law, these employees do not have to meet the salary test to be classified as exempt under the professional exemption. (California law differs).
Use of Non-Discretionary Bonus, Incentive Payments and Commissions
Under federal law, employers may calculate the amount of non-discretionary bonus and incentive payments per month (including commissions) to satisfy up to 10% of the standard salary test requirement.
If an employee does not earn enough in non-discretionary bonuses and incentive payments (including commissions) in a given quarter to retain their exempt status, the DOL permits a “catch-up” payment at the end of the quarter so that the status is not lost. If the employer chooses not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.
Comparison with California Law
California also requires an exempt employee to meet the “duties” test and the “salary” test. The duties test is essentially the same; the salary test requires an exempt employee to be paid a fixed weekly salary of no less than 2x minimum wage.
As we have addressed in prior newsletters, California’s minimum wage has increased and will continue to increase on the following schedule for employers with 26 or more employees (for employers with less than 26 employees, the minimum wage increases will be delayed by one year):
January 1 , 2017 $10.50 per hour
January 1, 2018 $11.00 per hour
January 1, 2019 $12.00 per hour
January 1, 2020 $13.00 per hour
January 1, 2021 $14.00 per hour
January 1, 2022 $15.00 per hour
So each time minimum wage increases the salary basis test increases. Currently with the recent increase in the minimum wage, exempt employees must earn an annual salary of $41,600 ($10 per hour x 2 x 40 hours per week x 52 weeks per year).
This amount falls below the federal standard so employers in California must now comply with the federal salary basis test for exempt employees until California’s minimum salary for exempt employees surpasses the FLSA’s new minimum – which will not occur until 2019 when California’s minimum salary becomes $49,920. However, the DOL has stated that the federal minimum salary will increase every three years, with the first update taking effect on January 1, 2020. With these increases the federal minimum salary may continue to be higher than California’s minimum salary.
Non-Discretionary Bonuses, Incentives and Commissions Not Approved for California
California has not adopted the new FLSA rule permitting the use of non-discretionary bonuses to make up 10% of the standard salary level. Until California courts interpret this new rule, California employers need to be cautious about using non-discretionary bonuses to satisfy the minimum salary.
What California employers can do is first meet the California minimum salary requirement and then use any discretionary bonuses (including commissions) to meet the remaining salary needed to meet the federal minimum salary.
What Should I Do Now?
The changes to the federal overtime requirements become effective on December 1, 2016.
- Employers should now begin to review their employee classifications to timely make any necessary changes to avoid any potential for overtime compensation.
- An employer has several options to address the new salary requirement:
- If an employee’s salary falls below the required amount, increase an exempt employee’s salary;
- Reclassify employees as non-exempt, pay an hourly wage and overtime after 40 hours per week (per federal law) and after 8 hours per week (California law);
- Reduce schedules to avoid overtime;
- Adjust an employee’s wage rate so that if overtime is worked the allocation between regular and overtime are such that the total amount paid to the employee remains the same.
This information is intended to provide guidance in the area of employment law and is provided as a service of the Firm. While every effort has been made to ensure the accuracy of the information contained in this bulletin, it is not intended to serve as “legal advice”. If additional information or assistance is needed on any of the topics contained in this informational package or any other matter, please feel free to contact Cynthia Elkins for further information. All rights reserved. © 2016