By Jeremy York, Human Resources field representative, Synergy PEO Services
Last year, the Department of Labor (DOL) announced proposed changes to the Fair Labor Standards Act (FLSA), the law that outlines overtime exemptions for workers.
These proposed changes will extend overtime protections to nearly five million workers by making many positions previously considered overtime exempt under the Act, nonexempt and eligible for overtime.
After 10 months of review, the final rule was published in May.
Overview
The final rule focuses on updating the salary and compensation levels needed for executive, administrative and professional workers in order to be exempt.
Specifically, the rule:
- Changes the standard salary level from $455 per week or $23,660 annually to $913 per week or $47,476 annually; meaning that employees must make at minimum the standard salary level to be classified as exempt.
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to the duties test to $134,004.
- Establishes a mechanism to automatically update the salary and compensation levels every three years to align with cost of living etc.
- 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.
Employers have until this Dec. 1 to comply with the final rule. This means that in order to be exempt from overtime, employees must make a minimum salary of $47,476 and satisfy the duties test outlined by the DOL for exemption from overtime (see table below). Employees who do not meet these criteria must be classified as nonexempt and paid overtime for any hours worked over 40 hours per week.
Basic requirements for claiming an exemption under the standard duties test
| Executive | Administrative | Professional | |
| Salary Basis Test | · Employee must be paid a salary, not hourly | · Employee must be paid a salary, not hourly | · Employee must be paid a salary, not hourly |
| Standard Salary Level Test | · $913 per week ($47,476 per year for a full-year worker) | · $913 per week ($47,476 per year for a full-year worker)
· Special salary level for certain academic administrative personnel |
· $913 per week ($47,476 per year for a full-year worker)
· Salary level test does not apply to doctors, lawyers or teachers |
| Standard Duties Test | · The employee’s “primary duty” must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise and managing two fulltime employees,
· Additional requirements provided in Section 29 CFR 541 Subpart B |
· The employee’s “primary duty” must include the exercise of discretion and independent judgment with respect to matters of significance.
· Additional requirements provided in Section 29 CFR 541 Subpart |
· The employee’s “primary duty” must be to primarily perform work that either requires advanced knowledge in a field of science or learning or that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
· Additional requirements provided in Section 29 CFR 541 Subpart D |
Special note for nonprofits
Nonprofit organizations have been identified as a sector that is most significantly impacted by these changes given their limited budgets and other financial factors.
The DOL recognized this and published a special overview and guidance for nonprofit organizations outlining how the FLSA applies to nonprofits:
- Enterprise coverage: All employees of an organization will be covered by the FLSA and overtime regulations, if the entity has annual revenues of at least $500,000, measured by volume of sales made or business done (See the guidance document for more detail.).
- Individual coverage: If the employer does not meet the standard for “enterprise coverage,” an individual employee will be covered by the FLSA if he or she engages in interstate commerce or in the production of goods and services for interstate commerce. This can include such regular activities like making out-of-state phone calls, receiving and sending mail or email, ordering goods from out-of-state suppliers (such as Amazon) and handling credit card transactions.
While some nonprofits may not be covered under the FLSA, it is likely that many employees of nonprofits are entitled to FLSA protections.
The DOL’s guidance document also outlines several options for nonprofits on how to address these changes. These options include:
- Raise salaries: For workers whose salaries are near the new salary standard and meet the duties test, the organization can raise their salaries to meet the new standard and maintain the employees’ exempt status.
- Pay overtime above a salary: Pay newly overtime-eligible employees a salary and pay overtime for hours in excess of 40 per week. The law does not require that newly overtime-eligible workers be converted to hourly pay status only from exempt to nonexempt.
- Evaluate and realign employee workload: Limit overtime by ensuring workloads are distributed to minimize overtime and that staffing levels are appropriate for the workload.
- Adjust employees’ base pay and pay overtime: Adjust the amount of an employee’s earnings to reallocate it between regular rate of pay and overtime compensation. This method works for employees who work a relatively small amount of predictable overtime. Example: Assume a fundraising supervisor at a nonprofit 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 and pay time and a half for the five overtime hours worked each week, keeping their annual compensation liability for this employee at $37,000 annually.
Compliance
To meet the Dec. 1 compliance deadline, organizations will need to craft a compliance strategy and review internal practices.
Currently, Synergy is working with its clients to:
- Conduct FLSA audits to identify which positions are impacted by the final rule.
- Develop actions plans for how to implement the new changes.
- Identify methods to reduce overtime for those roles that were previously exempt from it.
- Understand how these changes may impact company culture and employee morale.
Navigating through these changes can be challenging and even overwhelming. Therefore, it is recommended that you secure an HR partner that can assist in working through these changes. Utilize the right expertise to keep you compliant and to avoid legal action.
