The New Overtime Rule Has Been Blocked. Now What?

My advice on what to do until a final decision is made.

Overtime, Office Binder on Wooden Desk. On the table colored pencils, pen, notebook paper

A federal judge in Texas gave something employers could be thankful for just a few days before Thanksgiving. On November 22, he issued a preliminary injunction on the Department of Labor’s (DOL) overtime rule change that was to go into affect on December 1. It came about from a lawsuit brought by 21 states challenging the DOL’s authority to raise the salary threshold. This was pretty big news for us HR folks. Huge news actually.

Many small organizations, however, didn’t even know the rule was going into effect. I was at a meeting a few weeks ago with a payroll provider who told me that the majority of their clients didn’t know about the new rule when asked about it. It would be safe to say that most managers and small business owners are too busy operating their organizations and don’t keep up on these types of things.

In order to bring these organizations up to date, the rule was supposed to double the Fair Labor Standards Act (FLSA) salary threshold for determining the exemption from overtime from $23,660 to $47,476. This is where we get the exempt and non-exempt employee classifications which I define in this post from my introduction to my series of the FLSA overtime classifications. In addition, it would also automatically adjust the threshold every three years based on the 40th percentile of the weekly earnings of full-time salaried workers in the lowest-wage Census region. The Society of Human Resource Management (SHRM) has publicly opposed the new rule as it will hurt nonprofits and smaller organizations and have a negative impact on workplace flexibility and employee morale.

It’s important to understand that the preliminary injunction is not permanent and that the current overtime rule will still be in effect. The court needs to review the merits of the new rule and issue a decision which could take several more months. The fact that an injunction was issued in the first place, makes me think the new rule is doomed.

For those organizations that didn’t know about the rule, they can just go on about their business and not worry about it until a final ruling is issued. For those businesses that knew about it and were making plans or already made plans to comply with the new rule, things may be a little more complicated and until we get a final ruling, here is my advice:

  • Fortunately, the injunction was issued on November 22, before the payroll period in which the December 1 deadline fell. I had advised my clients to make their changes effective Sunday, November 27, the first day of the payroll period. By following my advice (Because I’m so smart, LOL), the re-classification of their exempt employees to non-exempt can be postponed until that final decision is made.
  • If the organization already re-classified their exempt employees to non-exempt, the organization will need to evaluate how the decision was accepted by the impacted employees. Did they take it well or did they take it poorly? If they took it well, the organization would be wise to leave the re-classification in place. If they did not take it well, the organization might benefit by reversing the re-classifications but need to make it clear to the employees that it may be temporary until the final ruling is issued.
  • If the organization already increased (or announced an increase) their exempt employee’s salaries in order to maintain their exempt status, it would be wise leave those increases in place. There will be a great deal of confusion and a big hit on morale if they reverse this decision. An organization can certainly reverse their decision but it will be at the cost of employee goodwill and engagement.

It will be very interesting to see how this case will eventually turn out. As I said earlier, I think the new rule, as it is currently written, will never come to pass. I think the judge issued the injunction because he thinks the challenge by the 21 states has a very good chance of being successful.

However, for those who made plans to comply with the rule, don’t toss out all the work that was done in preparing for it as the court may still issue a decision in favor of the DOL. At the very least, I anticipate that the rule will be scaled back with more gradual and less extreme salary threshold increases.

For those who didn’t know about the rule and didn’t make plans to comply, they’ve been given a pass for the time being but need to be ready to address it if a final ruling is made in favor of the DOL or a scaled back rule is issued.

The FLSA Administrative Exemption

Image courtesy of stockimages at FreeDigitalPhotos.net

Image courtesy of stockimages at FreeDigitalPhotos.net

In this third post in the FLSA Overtime Exemption series, I’m going to discuss the administrative exemption.

Again, as with all the exemptions, in order to be considered exempt the employee must meet the salary basis test which requires a minimum of $455 per week or $26,600 per year. One thing I have not yet mentioned previously in the other posts on the FLSA Overtime Exemptions is as part of the salary basis test the employee must receive a regular fixed and predetermined amount of compensation, minus permissible deductions, each workweek regardless of the quality or quantity of work done by the employee.

There are two duties tests 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.

In 2004 the Department of Labor (DOL) issued revised regulations in order to clarify some of the key concepts in these duties tests which I summarize below.

In the first duties test, the primary duty “directly related to the management of general business operations of the employer” means employees must perform work that is directly related to assisting with the operating or managing of the business and not working on the front line doing manual work.

Employees acting as consultants or advisor’s to an employer’s customers or clients may qualify for the exemption if their primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. A couple examples include financial consultants or tax experts.

The regulations also give some specific examples of administrative work related to the functional ares of a company’s business operations. These functions include tax, finance, accounting, auditing, purchasing, procurement, advertising, marketing, safety and health, human resources, public relations, legal, regulatory compliance, and Internet and database administration.

In the second duties test, things get a little more complicated regarding the statement “discretion and independent judgment with respect to matters of significance.” This statement means the employee has the authority to make an independent choice that is free from direction or supervision. An employee’s decisions can occasionally be reviewed and reversed and still be considered exercising discretion and independent judgment, and therefore, still be considered exempt.

Some factors to consider when looking at “discretion and independent judgment” are:

  • whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices;
  • whether the employee carries out major assignments in conducting the operations of the business;
  • whether the employee performs work that affects business operations to a substantial degree;
  • whether the employee has authority to commit the employer in matters that have significant financial impact;
  • whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation

Now, the term “matters of significance” means the level of importance or consequence of the work performed. The example from the DOL is an employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly.

It’s important to be very careful when classifying an employee under the administrative exemption. To me, it can be the most difficult one to get right.

Well, that concludes the administrative exemption post of my FLSA Overtime Series. The next post in the series will be the professional exemption.

The FLSA Executive Exemption

Image courtesy of stockimages at FreeDigitalPhotos.net

Image courtesy of stockimages at FreeDigitalPhotos.net

In the second installment of the FLSA Overtime Exemption I’m going to discuss the executive exemption.

As you recall there are two test that must be applied in order to be considered exempt from overtime pay. First, the salary basis test which is the same for all the exemptions (except for the computer exemption). As a reminder, the salary basis test is where employees who are paid less than $455 per week ($26,600 per year) are automatically considered nonexempt. If the employee is paid more than $455 per week, however, they then must also meet the duties test in order to be considered exempt.

The duties test for the executive exemption are fairly straightforward and all three of these requirements must be met in order to be exempt:

  • The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department of 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;
  • 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.

Although the duties tests are fairly straightforward, they do require further explanation.

Let’s start with the primary duty of managing the enterprise.

So what, exactly, does primary duty mean? According to the FLSA, primary duty means “the principal, main, major, or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.”

The relative importance of the exempt duties compared to other duties must be considered when determining the the primary duties. These include the amount of time spent performing exempt work, the employee’s freedom from direct supervision, and the relationship between the employee’s salary and the wages paid to other employees for doing nonexempt work performed by the particular employee.

The amount of time spent performing exempt duties is also addressed in the regulations. If the employee spends more than 50% of their time performing exempt duties they will usually satisfy the primary duty requirement. If, however, an employee spends less than 50% of their time doing exempt duties they may meet the exempt duty requirement if other factors support it.

Next, let’s discuss the primary duty of customarily and regularly direct the work of two or more full time employees. This duty is the most straightforward of the three. An employee must regularly direct the work of two or more full time, or full time equivalent, employees. For example, an employee who supervises four half time employees will meet the requirement.

Third, let’s discuss the requirement of an employee having the authority to hire or fire other employees or their suggestions to do so carry a particular weight. It’s interesting to note that this requirement is to hire or fire, not necessarily both.

This duties test gets complicated where an employee who may not necessarily have the authority to hire or fire other employees, but may have significant influence over hiring or firing. The employee’s suggestions carry a particular weight with the employer concerning hiring or firing decision. In order for the influence to be considered, the DOL requires three key factors:

1. Making such recommendations is actually a part of the employee’s job duties;
2. The frequency with which the employee makes the recommendations and the frequency with which the
employer requests the recommendations;
3. The frequency with which the employer actually adopts the employee’s recommendations.

So, if the employee’s recommendations are not requested and/or followed, the employee will not meet this executive exemption requirement. However, the employee will meet this requirement if their recommendations have particular weight and are followed even though they don’t have the official authority to do so.

Again, all three of the above duties must be satisfied along with the salary basis test in order for an employee to to classified as exempt under the executive exemption.

On a final note, what do we do when an employee has both exempt and nonexempt duties? The DOL covers this situation in what they call Concurrent Duties. Basically, to be considered exempt, the employee must perform their executive duty responsibilities on a regular basis and decide when and for how long to perform their nonexempt tasks. The employee cannot be directed by a supervisor to perform exempt work.

Working supervisors who’s primary responsibility is performing nonexempt duties but who have some responsibility of supervising other nonexempt employees are not considered exempt.

Well, that concludes the summary of the FLSA executive exemption. Next week, I will cover the professional exemption.

The FLSA Computer Exemption

Image courtesy of watcharakun at FreeDigitalPhotos.net

Image courtesy of watcharakun at FreeDigitalPhotos.net

As promised, this week I am going to explore the FLSA computer exemption classification.

First, a bit of history, before 1990 employees employed in computer related occupations could qualify as exempt executive, administrative, or professional employees. But in 1990, the Secretary of Labor issued regulations that allowed “computer system analysts, computer programmers, software engineers, and other similarly skilled professional workers” to qualify as exempt executive, administrative, or professional employees as long as they were being paid an hourly rate of at least six and a half times the basic federal minimum wage which was $4.25 at the time. This made hourly computer employees exempt if they were paid at least $27.63 per hour and met the job duties test. This is where the unusual $27.63 per hour rate for computer employees comes from! The 1990 legislation treated computer employees as professional exempt employees if they met the job duties test and were paid at least $27.63 per hour.

The 1990 amendments were implemented in 1992 by the Department of Labor and the primary duties tests of computer professionals were added to the regulations.

Then in 1996, Congress amended the FLSA to add a specific exemption for computer employees and fixed the minimum hourly rate at $27.63 per hour. They also made into law, the defined primary duties of computer professionals from the 1992 regulations.

The most recent update to the computer classification occurred in 2004. The new regulations simplified the duties test for computer professionals. The regulations also replaced a “long and short” weekly pay test with the $455 per week test. Computer employees are exempt if they are paid at least $455 per week but if they are paid by the hour they are exempt if they are paid an hourly rate of $27.63. Of course in both cases they must also meet the duties test.

As I pointed out last week, the $455 per week equals an annual salary of $23,660 whereas the $27.63 per hour equals an annual salary of $57,470 – a huge difference. I was able to discover, as I reported earlier in this post, how this happened but find it curious that the $27.63/hour came about in 1990 and the $455/week came about fourteen years later in 2004. I was unable to uncover anything during my research but maybe one of my readers/listeners knows the reason behind this.

An important note to cover, the 2004 regulations also removed the requirement that exempt computer employees must consistently exercise discretion and independent judgment.

So in addition to the computer professional being paid an hourly rate of $27.63 per hour or on a salary or fee basis of at least $455 per week, they must also meet the primary duties tests including at least one of the following:

  • The application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional specifications; or
  • The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or
  • The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
  • A combination of the duties listed above, the performance of which requires the same level of skills.

So there you have a brief history of how the computer exemption classification came about and where we are today. My next post and podcast will be on the executive exemption classification.

Note:  Please excuse the low quality recording of this week’s episode. I had to scramble to get it recorded and published and, as a result, the quality suffered. I promise to do better next week!!

Introduction to FLSA Overtime Classifications

Image courtesy of shirophoto at FreeDigitalPhotos.net

Image courtesy of shirophoto at FreeDigitalPhotos.net

The Fair Labor Standards Act (FLSA) is a federal law that requires employers to pay overtime to employees. It was passed in 1938 and established the forty hour
work week, a national minimum wage, established prohibitions on employing minors, and guaranteed overtime pay of time and a half for certain jobs.

Today, I will focus on the guaranteed overtime provision and begin an exploration of the exempt and non-exempt pay classifications as a series of posts and podcasts.

Since this is the first post on the topic, I will just give a summary of the overtime provision and later will give more detail in future posts.

The FLSA requires most employers to pay employees who work more than 40 hours in a workweek a rate of one and one half times the employee’s regular rate of
pay. There are certain, well defined exceptions to this rule, however. Exceptions that I will begin discussing in today’s post.

The FLSA defines two classifications of employees – exempt and non-exempt. Exempt employees meet the FLSA’s requirements to be exempt from overtime pay while non-exempt employees are required to be paid overtime. There are several exemptions, or tests, that the FLSA provides in order to help employers determine whether an employee is exempt or non-exempt.

For most employees, their exempt or non-exempt classification status depends on how much they are paid (salary level test), how they are paid (salary basis test), and what kind of work they do (duties test). In order to be classified as exempt, the employee must pass all three tests.

Salary level test: Employees who are paid less than $23,000 per year or $455 per week are automatically non-exempt. Computer professionals are a little different and are non-exempt if they are paid less than $455 per week or $27.63 per hour if paid on an hourly basis. Note that the $27.63 per hour comes to $1,105.2 per week which is more than double the $455. I’m not sure why this is so at this point and hope to find out when I write the computer professional exemption post.

These numbers are current as of today’s writing but it looks like they will be increased sometime in 2015.

Salary basis test: All exempt employees must be paid a salary but must meet the minimum salary requirements listed in the salary level test above. In addition, the employee must meet all other requirements of whichever exemption classification applies to their situation.

In order to pass the salary basis test, the employee’s weekly salary must be paid without reductions in their pay resulting from variations in the quantity or quality of the work they performed. The employee must be paid for any week in which any time was worked even if they came in late or left work early during that week. Their pay cannot be deducted. Deducting wages would result in the employee losing the exempt classification.

The duties test: Now the potential exempt employee who meets the salary level test and the salary basis test must now pass the duties test. The exemptions the FLSA permits are typically high level jobs. The most common exemptions are executive, administrative, professional employees, computer professionals and outside sales employees. I will devote a separate post/podcasts on each of these exemptions in the future.

Exempt employees have very limited rights under the FLSA overtime rules. Pretty much all they are entitled to under the FLSA is to receive the full amount of the base salary in any work period in which they perform any work. The employer can require exempt employees to work any particular schedule, make up lost time due to absences, and work any amount of work time the employer requires on any schedule.

It is important to understand that a non-exempt employee cannot waive their FLSA rights. An employer cannot have an agreement with an employee to work extra hours over the 40 hour workweek in exchange for additional benefits, comp time, or additional pay instead of earning the required overtime pay. An employee who willingly goes along with or requests an illegal pay arrangement has the right to sue the employer for FLSA violations and recover any back pay they are owed under the law.

The Department of Labor’s (DOL) Wage and Hour Division (WHD) administers and enforces the FLSA. It will usually initiate an investigation in response to an employee’s complaint of an employer’s overtime practice. If there are multiple complaints, the WHD may launch a full scale investigation consisting of employee interviews and subpoenas of company records. If there is just one complaint, however, the WHD will typically conduct a phone interview and small scale investigation called “conciliation.” The WHD can also assess a penalty of up to $1,000 per violation for repeated or willful violations of the FLSA overtime provision.

Well that covers the introduction into the FLSA pay classifications. Next week, I will focus on the computer professionals classification because I want to find out why the required hourly rate of $27.63 is so high compared to the required weekly rate of $455 per week.