The New Overtime Regulations and Their Impact on the Salary Basis Test
As we previously discussed here, the United States Department of Labor (DOL) recently changed the Fair Labor Standards Act’s (FLSA’s or the Act’s) Salary Level and Salary Basis tests for the white collar exemptions to the Act’s overtime requirement. Effective Dec. 1, 2016, employees must be paid at least $47,476 annually and $913 per week in order to meet the Act’s white collar exemptions. Highly Compensated Employees (HCEs) must be paid at least $134,004 annually and at least $913 per week of that annual amount must be paid in the form of a salary. All employees must also satisfy various “duties” tests, in addition to the aforementioned Salary Level and Salary Basis requirements. Under the new rule, however, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy a portion of the Salary Level and Salary Basis tests for all white collar exemptions other than the HCE exemption.
Changes to the FLSA’s Non-Discretionary/Incentive Payment Scheme
The new rule specifies that employers may now satisfy up to 10 percent of the Salary Level and Salary Basis tests using a variety of nondiscretionary or incentive payments. In other words, employers may use $4,747.60 annually and $91.30 per week in nondiscretionary incentive payments tied to productivity and profitability to satisfy those two tests, respectively. In order to take such a credit, employers must make bonus payments on a quarterly or more frequent basis. Employers can also make a one time “catch-up” per quarter to cover any shortfall from the previous quarter as long as the catch-up payment is not more than 10 percent of the Salary Level requirement. If the employer does not make the catch-up payment and the employee does not earn enough to satisfy the Salary Level and Salary Basis tests, the employee is entitled to overtime pay for any overtime hours worked that quarter. Employers of HCEs may use nondiscretionary bonuses and incentive payments (including commissions) to count toward the HCEs’ total compensation, but HCEs must receive no less than $913 per week ($47,476 per year) in salary. Nondiscretionary bonuses and incentive payments can make up the rest of an HCE’s required compensation.
Under the new regulations, all of these amounts will now be adjusted every three (3) years to ensure that the Salary Level and Salary Basis match the 40th percentile wage in the lowest wage region in the United States and the HCE Salary Level matches the 90th percentile wage nationally.
The “duties” test is difficult to satisfy and employers should not assume that they are in compliance with that test without a thorough review. What is more, bonus payment must be included in determining the employee’s regular and overtime rates of pay. These payments will significantly increase the employee’s regular rate of pay. There has been wide spread litigation alleging misclassification of employees as a result of changes in technology, reorganizations, and other business factors which change employees’ duties over time. Employers should expect an increase in FLSA suits as of Dec. 1, 2016 – such suits will bring additional scrutiny of an employers’ workforce Should an employer pay its employees bonuses in an attempt to satisfy the Salary Level and Salary Basis tests and not satisfy the “duties” test, it will have potentially increased a nonexempt employee’s prospective damages for earned but unpaid overtime by increasing the employee’s regular and overtime rates of pay. Employers should consider auditing employee job descriptions and the duties their employees actually perform to ensure compliance.