Who’s Exempt?


What you need to know to keep your business compliant with new overtime rules.

An upcoming federal rule change announced recently by President Obama has the potential to make millions of workers newly eligible for overtime, thereby affecting many of our clients and industry partners. This change, which does not require congressional approval and is slated to go into effect in 2016, will affect businesses of all sizes and in all industries.

Exempt Vs. Non-Exempt
Federal law, as established by the Fair Labor Standards Act (FLSA), sets minimum standards for wages and hours worked. The FLSA determines four main areas of federal labor law:  1) Minimum Wage, which is currently set at $7.25 per hour, 2) Overtime, which requires time-and-a-half pay for time worked in excess of 40 hours per week, 3) Definitions of what constitutes “Hours Worked,” and 4) Standards for Record Keeping of Time and Wages.

The FLSA was enacted in 1938 and has been amended by Congress over the years to, among other things, increase the federal minimum wage and address treatment of specific classifications of workers (such as the Age Discrimination in Employment Act and the Migrant and Seasonal Agricultural Workers Protection Act). The law applies to all workers except for those employees who are deemed “exempt” from the act.  This is where the terms “exempt” and “non-exempt” come from.

“Exempt” employees, often called salaried employees, have long been considered those who are paid a salary rather than an hourly rate, and thus are exempt from the FSLA’s time-and-a-half overtime rule.  Typically, these are high-income, white-collar employees—in the law they are specifically referred to as executive, administrative, professional, computer and outside sales professionals.

The most common type of exemption for businesses is the administrative exemption. This provision requires that, in order to be exempt from the FLSA, the employee must:

• Be compensated on a salary or fee basis at a rate of no less than $455 per week;
• Have as a “primary duty” the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customer, and
• As a “primary duty,” exercise discretion and independent judgment with respect to “matters of significance.”

The FLSA goes on to define many of these terms-of-art such as primary duty, discretion and independent judgment and matters of significance. If you google “DOL Fact Sheet #17” you will find the details of what conditions must be satisfied for a position to be considered exempt from the FLSA.
New Minimum Salary

The one element common among all exemptions to the FLSA is that the employee must be paid a minimum of $455 per week, or $23,660 per year. It is this rule that President Obama intends to change by increasing the minimum pay from $455 to $970 per week, or from $23,660 to $50,440 per year.

The minimum-salary level was established to cover all professionals who had highly specialized skills, executive level responsibilities and made significantly higher income than the average worker.  The “exempt” salary threshold has remained unchanged at $23,660 since it was last modified in 1975. At the time, 65 percent of salaried workers earned less than $23,660. Currently, only 11 percent of salaried workers earn less than $23,660. (Source: Economic Policy Institute.)

Impact On Your Business

The financial and administrative impact of this change is likely to be significant. For example, many employers with low- to mid-level supervisory and managerial staff, such as those in the janitorial, service, retail, and restaurant sectors, will see a lot of these employees fall under the newly raised threshold and, accordingly, will have to pay them overtime for any time worked in excess of 40 hours.  Here’s what the change will require:

• For exempt employees who currently earn between $23,660 and $50,440 per year, employers will now have to reclassify them as non-exempt and track all hours worked and maintain time and recordkeeping according to FLSA standards.
• For time worked in excess of 40 hours a week, they will need to pay time-and-a-half overtime.

As it currently stands, the rule change is not expected to require that employers pay these employees on an hourly basis—most likely they will still be able to be paid on a “salaried” or annual basis. However, it does require that all time will have to be tracked and that overtime be paid for additional hours in excess of 40 hours a week.

How To Prepare Now

Take time now to determine how many employees this rule change will affect and how you plan to implement the necessary timekeeping and overtime payment requirements. Do an audit of your existing workforce to determine whether your current salaried/exempt employees truly qualify for the exemption under the FLSA. (Unfortunately, we find that many of our clients incorrectly classify customer service and administrative/offices staff as exempt even though they don’t satisfy the minimum salary or duties set forth under the exemptions. This can leave them open to damages for back pay of overtime and further penalties in the event of a successful lawsuit or regulatory action.)

While the final rules on this salary threshold are yet to be released, our best advice is to do your research early to find out how many employees may be affected and develop a plan for managing and tracking employees’ time going forward.


>>Q&A With Claudia St. John

Q:  We have been hearing about the new changes to overtime that the Obama Administration is implementing. It is okay to require approval for overtime and is it permissible to withhold overtime payment if the hours worked are unapproved?

Yes and no. Yes, overtime can require prior managerial approval.  And no, you cannot withhold payment of unapproved overtime—the Fair Labor Standards Act is very clear that employees must be paid for all time worked, whether approved or not. Instead, employers should treat unapproved overtime as a disciplinary issue subject to the company’s progressive disciplinary process, whereby repeated violations of the overtime approval policy can lead to suspension or dismissal.

Q:  We are very short-staffed right now and my customer service team is putting in many late hours and working over the weekend to get caught up. Can I provide comp time to them? Some have said they would prefer that to overtime.

Presuming your customer service team members are classified as non-exempt, hourly employees, you cannot substitute comp time for overtime. These determinations are well established by the National Labor Relations Act. You may offer comp time to your non-exempt employees in addition to overtime they are due, but not in lieu of it.

Send your human resources-related questions for Claudia St. John to ppb@ppai.org. Select questions will be answered in future issues.

Claudia St. John is president of Affinity HR Group, LLC, PPAI’s affiliated human resources partner.  Affinity HR Group specializes in providing human resources assistance to associations such as PPAI and their member companies.  To learn more, visit www.affinityhrgroup.com.

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