by Vladimir Shuliga, Jr. (Summer 2016)
The Fair Labor Standards Act (“FLSA”) is a federal statute establishing a minimum wage and an overtime pay for any hours worked over 40 in a week. However, there are several exemptions to the minimum wage and overtime protections. A large majority of so-called “white collar” employees are “exempt” from the minimum wage and overtime protections based on the executive, administrative, and professional employee exemptions. In addition, there is an exemption for highly compensated employees. In order for an employee to qualify for any of the white collar exemptions, an employee must meet a two part test: (1) the salary threshold; and (2) the duties test.
Since 2004, the U.S. Department of Labor (“DOL”) regulations have provided that the salary threshold is $455 per week which equates to $23,660 per year. In addition, the duties test requires that an executive, administrative, or professional employee perform certain duties in order to qualify for the exemption. Both tests must be met in order for an employee to be considered exempt from the FLSA minimum wage and overtime protections under the white collar exemptions. The highly compensated employee exemption similarly requires certain duties and a salary threshold to be met.
On May 18, 2016, the DOL issued final regulations increasing the salary thresholds for the white collar and the highly compensated employee exemptions. Before addressing the changes found in the final regulations, this article will briefly summarize the current regulations. As noted above, the current salary threshold is $455 per week paid on a salary basis for the white collar exemptions. The executive, administrative, and professional exemptions each have their own duty standards:
Executive Employee Duties Test
- Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
- Who customarily and regularly directs the work of two or more other employees; and
- Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.
Administrative Employee Duties Test
- Whose primary duty is 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
- Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Professional Employee Duties Test
- Whose primary duty is the performance of work requiring knowledge of an advanced type (defined as work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment) in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or
- Whose primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
Highly Compensated Employee Exemption
The FLSA contains specific regulations regarding highly compensated employees that are related to the white collar exemptions identified above. A highly compensated employee is deemed exempt under FLSA if:
- The employee earns total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis;
- 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.
DOL Regulatory Changes
The DOL issued its final regulations on May 18, 2016. The final regulations become effective December 1, 2016, so employers are given several months to adjust to the new overtime regulations outlined below. The final regulations focus on updating the salary levels to be applied for the white collar exemptions. Specifically, the new rules change the following:
- Set the salary level at the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region which currently equates to $913 per week or $47,476 annually
- Increase the total annual compensation required to meet the “highly compensated employee” exemption to the annualized value of the 90th percentile of weekly earnings for full-time salaried workers which equates to $134,004.
- Automatic updates of the salary thresholds for FLSA exemptions.
- Every 3 years the standard salary level will be maintained at the 40th percentile of full-time salaried workers in the lowest-wage census region
- Every 3 years the highly compensated employee exemption will be maintained at the 90th percentile of full-time salaried workers nationally.
Comments and Conclusions
The updated regulations reflect the Obama administration’s effort to address what it deems to be outdated FLSA standards. This round of changes focuses on the salary thresholds primarily because those amounts have remained stagnant since 2004. Nonetheless, the fact that the DOL is revisiting the FLSA overtime exemptions serves as a reminder for employers to review employee designations as either exempt or non-exempt employees. The immediate impact of the regulatory changes to the salary thresholds is to expand the number of employees who will be entitled to overtime compensation unless their annual salary exceeds the new threshold amount. Employers should analyze their current wage practices and determine if those practices need to change based on the finalized DOL regulations. Employers should also revisit job descriptions that are in place for exempt positions. Aligning job descriptions with the DOL regulations that address the duties portion of the test will make it relatively straightforward to keep exempt positions in line with a changing salary threshold. It is prudent to ensure that all employees that are intended to be exempt employees are performing the correct job duties so that the duties portion of the test is satisfied regardless of the changing salary threshold. Employers must also train employees who become non-exempt on overtime policies and any changes in benefits associated with the change in status.
Keep in mind that employers must maintain records of the hours worked each day in each work week of all employees, both exempt and non-exempt, under recent amendments to the Illinois Wage Payment and Collection Act. Finally, all of these recommendations remain subject to labor negotiations for union employees.