Published in the Greater Concord Chamber of Commerce’s newsletter
By now businesses are aware that the US Department of Labor (USDOL) has proposed an increase in the minimum salary for employees to qualify for the “white collar” exemption tests for the administrative, executive, learned professional or computer exemptions pursuant to the Fair Labor Standards Act (FLSA). Qualifying for one of the exemptions means that the employee is exempt from the minimum wage and, significantly, the overtime requirements of the FLSA.
The proposed increase in minimum salary for these exemptions would go from the current $455 per week ($23,660 per year) to $970 per week ($50,440 per year). This new salary represents the 40th percentile of earnings for all full-time salaried workers throughout the United States. The USDOL is also proposing to increase the minimum salary an employee must earn to meet the highly compensated exemption, from $100,000 to $122,000, which is tied to the 90th salary percentile. The USDOL recommends that the salary amounts be increased annually tied either to the Consumer Price Index or the Current Population Survey. This means that each year employers may need to modify their payrolls to ensure their employees are properly classified as exempt. Currently, there are no proposed changes to modify the standard duties tests for the exemptions.
Businesses often believe that if they pay an employee a salary, the employee is not eligible for overtime pay: that is not always accurate. The FLSA controls which employees are exempt from overtime according to its exemption categories: administrative, executive, learned professional, computer, sales, and highly compensated. If the employee’s wages and job responsibilities do not fit within an exemption, he or she must be paid overtime for time actually worked over 40 hours in a work week. With these changes to the minimum salary, workers who meet the duties tests (described below), but no longer meet the new salary basis will no longer meet the exemption and must be paid overtime.
For example, in order to qualify for the administrative exemption, all of the following tests must be met:
- The employee must be compensated on a salary basis ($455 per week changing to $970);
- 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.
To qualify for the executive exemption, all of the following tests must be met:
- The employee must be compensated on a salary basis ($455 per week changing to $970);
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- 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 other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
While the proposed changes have not been implemented yet, it is expected that they will go into effect sometime in early 2016. The USDOL estimates that the new regulation will eliminate the exempt status for approximately 21.4 million employees. The proposed rule will have more of an impact on certain geographical regions and industries, in particular retail and hospitality. Therefore, it is important that businesses take the opportunity, while not under pressure, to conduct wage audits, review their wages scales and handbook policies to identify employees whose status may change to non-exempt in order to prepare for any financial impact.
Beth Deragon is an attorney in the Employment Law Practice and Litigation Group at the law firm of McLane Middleton. Beth can be reached at beth.deragon@mclane.com or at (603) 628-1490. She also contributes regularly to www.employmentlawbusinessguide.com.