REVIEWING THE UPCOMING OVERTIME PAY RULE CHANGES
December 8th, 2019 | Lars H. Anderson
In recent years, wage and hour settlements have cost U.S. companies in excess of one billion dollars a year. With a new regulation of the Fair Labor Standards Act (FLSA) going into effect on January 1, 2020, it is important for employers to review the changes, and take measures to avoid costly misclassification of employees.
Who Is Covered by FLSA?
The FLSA covers “enterprises” whose annual sales total at least $500,000; or are engaged in interstate commerce. HKQ Law employment Attorney Lars Anderson notes that “the term ‘interstate commerce’ has been interpreted very broadly by the courts.” (For example, companies that regularly use the U.S. mail to send or receive letters to and from other states are viewed as engaging in interstate commerce.) Even if the business fails to meet the criteria of the “enterprise coverage test”, individual coverage still applies to any employee whose work involves interstate commerce. Certain institutions such as hospitals, nursing homes, and schools are also under the auspices of FLSA.
What Are the FLSA’s Overtime Requirements?
Under FLSA overtime eligible employees are required to receive 1-1/2 times their regular rate of pay for all hours worked in excess of 40 in a given work week. There are, however, some employees who are exempt from the overtime regulations. In order to be classified as overtime exempt the employee must meet the requirements of the specific exemption. FLSA sets forth a two-prong test: (1) the employee must meet a salary level threshold, and (2) the employee’s duties must coincide with the exemption classification.
Common exemptions under FLSA include:
• Executive, administrative, and professional (EAP) employees
• Commissioned sales employees
• Computer professionals
• Seasonal and recreational establishments
What Changes on January 1, 2020?
The new regulation:
• raises the “standard salary level” from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);
• raises the total annual compensation requirement for “highly compensated employees” from the currently enforced level of $100,000 per year to $107,432 per year of which $684 must be paid weekly on a salary or fee basis;
• allows employers to use non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level; and
• revises the special salary levels for workers in U.S. territories and the motion picture industry.
What Stays the Same?
The “duties tests”, which require that employees meet certain duties requirements in order to be exempt from overtime, have not changed.
For the executive exemption:
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; and
• The employee must customarily and regularly direct the work of at least two or more other full time employees or their equivalent; and
• The employee must have the authority to hire or fire others.
For the administrative exemption:
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
The term “business operations” includes but is not limited to working in the following areas: tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations, government relations; computer network, internet and database administration; legal and regulatory compliance; and similar activities.
There are two classifications under the professional exemption: learned professional and creative professional.
For the learned professional exemption:
• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominately intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; and
• The advanced knowledge must be in a field of science or learning; and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
For the creative professional exemption:
• The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
For the highly compensated exemption:
• The employee’s primary duty includes performing office or non-manual work; and
• The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
Non-management production line workers and employees who perform work involving repetitive operations with their hands, physical skill, and energy are not exempt under this section no matter how highly paid.
When Do State Overtime Regulations Come Into Play?
Most states have their own overtime regulations. A state can provide workers with more rights and benefits than offered by the FLSA, but not less.
When the state and federal regulations conflict, the regulation most favorable to the employee prevails. For example, in Pennsylvania, computer employees are not considered exempt as they are under FLSA. As a result these employees are typically entitled to overtime. Another difference between Pennsylvania and FLSA regulations is that Pennsylvania does not allow the use of the fluctuating workweek method of paying overtime to salaried workers whose workweek fluctuates above and below 40 hours per week.
How Can Businesses Prepare?
There are a number of steps an employer can take to prepare for the new regulation, and avoid costly mistakes.
1. Analyze the situation.
Examine each employee’s compensation and job duties and responsibilities to make sure that employees are properly classified as overtime eligible or overtime exempt. Be mindful of how the new regulation may affect an employee’s current classification.
2. Make necessary changes.
The new FLSA overtime regulation may necessitate that you either reclassify an employee as nonexempt, or raise his or her salary to meet the new threshold. Determine the most cost-effective classification based on the employee's typical work hours.
3. Discuss the changes.
If an employee who was previously classified as overtime exempt is reclassified as overtime eligible have a discussion with the employee to ensure that he or she understands what the change means with regard to their hours of work and/or compensation.
4. Track hours accurately.
It is especially critical that the hours salaried employees who do not qualify as overtime exempt are accurately tracked to ensure overtime compensation is paid when appropriate.
If you have any questions about how the new overtime regulation effects your business, call HKQ Law at (800) 760-1529 to speak with an employment law attorney.