Employers Need To Evaluate Overtime Exemptions In Light Of New Department Of Labor Rules

Employees currently classified as exempt, but who make less than $47,476 per year, will no longer be considered exempt according to new overtime rules recently issued by the United States Department of Labor. The increased, minimum-salary threshold is higher than California’s current minimum-salary threshold to qualify as an exempt employee under California regulations.

The new Fair Labor Standards Act (“the FLSA”) rules go into effect December 1, 2016 (“Final Rules”). As a result, it is critical that employers review their current, exempt classifications for executive, administrative and professional exemptions (the “white-collar” exemptions) for compliance with the Final Rules, and make modifications to their classifications and workforce where necessary. Issues to consider, and to discuss with legal counsel, include ensuring that the salary levels for exempt employees meet the new minimum-salary requirement; assessing the impact of any required, salary increases on the employer’s overall workforce compensation structure; reclassifying employees from exempt to non-exempt, or vice versa; limiting non-exempt employee work hours to avoid overtime; assessing and planning for the impact of reclassification on employee benefits eligibility and accrual; and developing a communications plan regarding any changes in classifications or salaries. This also would be an ideal time to verify that employees who are treated as exempt employees actually meet the federal and California exempt duties tests. After all, merely paying a high enough salary does not satisfy the “exempt” test in California.

The impact of the Final Rules on California employers is of particular significance. California employers will need to reevaluate whether employees currently exempt under the state, white-collar exemptions also satisfy the higher FLSA minimum-salary requirement. The “gap” that will be created between the federal and state salary requirements, i.e., the gap on December 1, 2016, between $47,476 and $41,600, means that California employers have additional factors to consider in their analysis of exempt positions. Some of those considerations are discussed later in this E-alert.

Below is a summary of some of the key revisions under the Final Rules.

Increase To The Salary Threshold For Federal White-Collar Exemptions

To be exempt from federal overtime, an employee must satisfy a “duties test” and make a minimum salary. As mentioned above, the minimum-salary requirement under the federal regulations will more than double under the Final Rules. The “duties test” associated with qualifying for the white-collar exemptions will remain unchanged. On December 1, 2016, the minimum required salary for the exemption will jump from $23,660 per year ($455 per week) to $47,476 per year ($913 per week). Moreover, the minimum salary will be adjusted automatically every three years, with the first adjustment to take place in January 2020. Each salary adjustment will be published at least 150 days before its effective date.

Increase To The Salary Requirement For Highly Compensated Employee

Under the FLSA, the “highly compensated employee” exemption (“HCE”) currently applies to employees who have a total, annual compensation of at least $100,000 and who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee. The Final Rules increase the total annual compensation requirement for the HCE to $134,004 per year. The minimum, annual compensation requirement for the HCE also will automatically increase every three years.

California employers should keep in mind that the HCE is not recognized under state law. Therefore, California employees performing non-exempt duties who are paid more than $134,004 per year are still considered non-exempt under state law and are still entitled to California-required overtime, meal periods, and rest periods.

Use Of Nondiscretionary Bonuses To Meet New Salary Requirements Permitted

The Final Rules allow employers, for the first time, to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new, federal, salary requirement, provided that such payments are made on at least a quarterly basis. Of note, however, the Final Rules do not define “quarter” or provide any guidance on how to measure the time period (i.e., whether by calendar year, as decided by the employer, on a rolling basis, etc.).

California Employers And The Salary “Gap”

To qualify as exempt under California law, in addition to meeting the duties requirement, employees also must meet the California salary requirement, which is tied to California’s minimum wage. Generally, an exempt employee must earn a monthly, fixed salary equivalent to no less than two times the state minimum wage for full-time employment. Under the current $10.00 per hour state minimum wage rate, California’s salary threshold is roughly $41,600 per year ($800 per week), which is less than the new, federal, minimum requirement.

The gap between these state and federal minimum-salary requirements could result in certain California employees being exempt from California’s overtime laws (including daily overtime and meal and rest period requirements), but not exempt from the federal laws that require 1.5x overtime pay for all hours worked over 40 in a workweek (but has no daily overtime requirement). California employers that have employees who are affected by this “gap” will need to evaluate the best compliance method for their business model. For example, an employer may choose to simply raise their employees’ salary to also satisfy the federal requirement. However, because the federal minimum-salary requirement will increase every three years (starting in 2020), employers would have to consider a corresponding salary increase to satisfy the ever-changing, federal minimum-salary requirement. Alternatively, an employer may choose to pay federal overtime for hours worked over 40 in a workweek. Affected California employers also may consider incorporating the now-permissible nondiscretionary bonuses and incentive payments into employee compensation in order to satisfy the federal-salary threshold. The implementation of any of these options should be discussed with employment counsel.

The Impact Of California’s Increasing Minimum Wage

California employers also must keep in mind that the recently enacted state minimum wage law (Senate Bill 3) discussed in a recent E-Alert that can be found here, will increase the California minimum wage annually, beginning in 2017, until it reaches $15.00 by January 2022 for employers who employ at least 25 employees, and by January 2023 for employers who employ fewer than 25 employees. Thus, California employers must track the scheduled increases under both the federal and state laws for compliance with each. The scheduled California minimum-wage increases mean that larger California employers will need to pay their exempt employees an annual salary of at least $49,920 by 2019, $54,080 by 2020, $58,240 by 2021, and $62,400 by 2022, in order to qualify as exempt under state law. California employers who employ fewer than 25 employees have one additional year to meet these minimums. Under the Final Rules, the minimum salary requirement will increase to the estimated annualized levels of $51,168 in 2020 and $55,108 in 2023. If these estimated federal figures remain around the same ballpark, the California state minimum salary requirement for exempt status will again be higher than the federal minimum salary requirement for exempt status in 2019.

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If you have any questions about the Final Rules and its impact on your workforce, or any other question about your company’s employment policies, please contact your SFSSW attorney. If you do not presently have an attorney with the firm, please contact Millicent Sanchez, Janet Swerdlow, or David Wimmer.

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