What’s Happening With the Federal Overtime Rule? -- An Update for Businesses on the Latest FLSA Regulations.
by Cara Nicklas
In May, President Obama and DOL Secretary Tom Perez finalized a federal overtime rule that would have significant impact on small businesses, churches, and other nonprofits organizations. The rule was scheduled to go into effect on December 1, 2016. The new rule raises the salary threshold for employees to be exempt from overtime pay from $23,660 to $47,476. Under the new rule, “exempt” employees not currently being paid overtime for hours worked in excess of 40 hours in a work week must be paid overtime unless they earn a salary of $47,500. The new rule is anticipated to extend overtime pay to over 4 million workers within the first year of implementation. In a state such as Oklahoma with a low cost-of-living, the impact on Oklahoma businesses and nonprofits would be significant.
Businesses were gearing up to implement the new rule but on November 22nd, a federal judge issued a preliminary injunction delaying the implementation of the rule until the court reviews the merits of a case challenging the new regulation. While businesses received a reprieve, it is still a good time to review how you designate your workers for purposes of overtime, to ensure compliance with federal law, and to prepare for the possible enactment of the new rule.
The Fair Labor Standards Act (FLSA) guarantees a minimum wage for all hours worked during the work week and overtime premium pay of not less than 1½ times the employee’s regular rate of pay for hours worked over 40 in a workweek. These protections extend to the majority of workers. However, the FLSA provides some exemptions to these rules. Exemptions from minimum wage and overtime pay are granted for executive, administrative, and professional employees (referred to as the “EAP” or “white collar” exemptions). Currently, to be considered “exempt” from FLSA regulations regarding minimum wage and overtime pay, an employee must:
- meet certain minimum requirements related to their primary job duties (“duties test”),
- must be salaried, meaning he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”) and
- must be paid a salary not less than $23,660 (the “salary level test”).
The new regulation increases the standard salary level to $47,500 and provides for automatic adjustments in the salary level every three years to keep pace with U.S. wage growth. The federal district court’s “preliminary injunction preserves the status quo while the court determines the department’s authority to make the final rule as well as the final rule’s validity,” said Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas in a November 22nd ruling. So, for now, employers may still designate an employee as “exempt” from overtime pay so long as the employee’s salary is over $23,660.
The employer bears the burden of determining whether its employees are exempt from the FLSA’s pay requirements. Job titles and job descriptions do not determine exempt status nor does paying a salary rather than an hourly rate. To qualify for the EAP exemption, employees must meet all three tests. Determining whether an employee is exempt is a highly individualized determination. The duties test is a high bar for employers to meet in order to treat an employee as an “exempt” employee. The new regulation raises the bar for the salary level test such that employers would have an even greater challenge in order to designate an employee as “exempt” from the FLSA pay requirements.
It is imperative that each employer evaluates its process for designating exempt and nonexempt employees for FLSA purposes. The penalties that may be imposed by the DOL are significant. Even if an employee agrees (and desires) to be “exempt” so he or she has a flexible work schedule and the employee does not file a complaint with the DOL, the federal government can, on its own, audit a business and require back overtime pay and fines to be paid. A delay of the new overtime regulation does not mean the U.S. DOL won’t continue to pursue violations of the current FLSA regulations.
Even though the implementation of the new rule is delayed indefinitely, the federal district court could ultimately uphold the rule. Employers are advised to review their wage practices in order to ensure all employees are properly classified and to prepare for the possibility that the district court’s block of the new regulation is lifted.