Fair Labor Standards Act (FLSA) Overview

The Fair Labor Standards Act (FLSA) requires that all covered employers pay their employees compensation for hours worked over forty per week at one and a half times their regular rate of pay, unless exempt.

Exemptions under FLSA

Although the FLSA has numerous exemptions for overtime, some as innocuous as those who make wreaths in their homes or process maple sap into syrup, the most common exemptions are those known as the “white collar exemptions.”

White Collar Exemptions

These exemptions are available to those employees primarily engaged in nonmanual labor in positions of management or upper-level administration and certain learned professionals with advanced degrees. These exemptions require that the employee be paid a predetermined amount of pay regardless of the quantity or quality of work. Their salary must also meet a prescribed threshold which is currently no less than $648.00 per week or $35,568.00 per year.

Proposed Changes by the Department of Labor (DOL)

The DOL has issued a proposed rule which seeks to elevate that salary to $1,059.00 per week or $55,068.00 per year. The new rule also raises the salary threshold for highly compensated employees to $143,988 from $107,432.00 per year. The proposed rule will also provide that the salary threshold will automatically be updated every three years to reflect current data on earnings.

Anticipated Impact of Proposed Changes

It is estimated that these changes will eliminate over three million positions that are currently exempt from overtime unless employers respond by increasing salaries by over 50%. The DOL does not hide that its purpose is in fact to eliminate overtime exemptions. Acting Secretary Julie Su commented in support of the proposed rule:

“I’ve heard from workers again and again about working long hours, for no extra pay, all while earning low salaries that don’t come anywhere close to compensating them for their sacrifices. Today, the Biden-Harris administration is proposing a rule that would help restore workers’ economic security by giving millions more salaried workers the right to overtime protections if they earn less than $55,000 a year. Workers deserve to continue to share in the economic prosperity of Bidenomics.”

The DOL estimates that small entities will see the biggest impact with 1.3 million employees affected, mostly in the professional and technical services, health care services, and retail trade.

Although the numbers may be subject to change after public comment, it is likely that some increase will result. The most recent overhaul in the overtime exemption was in 2020. Although President Obama had requested an increase in the salary threshold to $50,400.00 which he believed would increase the number of workers receiving overtime pay by five million, after a federal court struck down that rule, the DOL rule was pruned to the current threshold of $35,568.00 resulting in an increase of only 1.3 million in workers receiving overtime pay.

How Can Employers Prepare?

Regardless, employers must be ready for the likelihood that their workforce will be impacted by the final rule. Actions that employers can take now include:

• Identify those currently exempt employees that will fall below this proposed salary threshold and determine whether to increase their salaries or convert them to non-exempt employees.
• Devise a plan to provide advance notice to those impacted as well as their managers.
• Train managers of these impacted employees on record-keeping policies and procedures with which they may not be familiar especially meal breaks, call-ins, donning and doffing rules, and de minimis time activities.
• Determine which policies and procedures, including leave and benefits, which now may or may not be applicable to these impacted employees;

Importantly, be prepared to respond to the potential outcry from the impacted employees who now have to record all of their time. Being overtime exempt for many employees is viewed as a respected achievement they have earned and they may deem the designation as non-exempt to be a demotion. They may not understand that the change is DOL driven and not internal to the company.

Conducting Compliance Audits

Lastly, don’t overlook the gift that a periodic change in the salary threshold may bring. It is a great time to conduct an audit of all of your overtime exempt employees to assure they are properly classified. Not only must the employer meet the salary basis requirement and salary thresholds white collar exemptions are tightly tied to certain prescribed duties. Those duty requirements are often misunderstood or not fully explored by the employer such that the employees are misclassified as exempt. When reviewing an employer’s compliance with these exemptions, the DOL will not rely on a position description but on the actual duties performed by the employee.

Understanding Exemptions

Executive employees are those whose primary duty is managing the enterprise or a customarily recognized department or subdivision of the enterprise and who customarily and regularly direct the work of at least two more full-time employees or their equivalent. They also must have the authority to make employment decisions such as whether to hire, promote, or fire other employees or whose recommendations carry particular weight.

Administrative employees are those whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or its customers in functional areas such as tax, finance, quality control, purchasing, marketing, human resources, and the like. This duty must duty involve the exercise of discretion and independent judgment with respect to matters of significance which encompasses more than simply applying well-established techniques or specific standards described in manuals or other sources. They generally are able to waver from established policies when necessary to further the interests of the employer.

Professional employees are those employees whose primary duty is the performance of work requiring advanced knowledge from a prolonged course of specialized learning and generally involves work of an intellectual nature in a field of science or learning requiring the consistent exercise of discretion and judgment in analyzing, interpreting, or making deductions from varying facts and circumstances.

Highly compensated employees are those employees who perform office or non-manual work and customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee.

Critical Considerations for Employers

The exemption most fraught with risk is the administrative exemption. Employers often overlook the requirement that such employees not only must perform certain significant administrative functions they must do so with independent judgment and discretion. Another common error is a failure to meet the salary basis test. Employers often make improper deductions from salary when an employee fails to appear for work or fails to establish at the commencement of employment the required predetermined weekly salary amount.

As we learned from the Helix Energy Solutions Group, Inc. v. Hewitt decision from the U.S. Supreme Court earlier this year, merely paying the same weekly amount as a matter of course or happenstance is not the same as promising to pay a predetermined amount at the time of hire. Only the latter will meet the salary basis test. A properly conducted audit can reveal these errors and assure that an employer is compliant with these exemptions. A failure of compliance can result in liquidated damages equal to twice the unpaid overtime compensation for the past two (three years if the error is determined to be willful) and reimbursement of the employee’s attorney fees.

Employers are often concerned about how to explain to employees why they are conducting an audit of the manner in which they have determined that an employee should be classified as exempt or non-exempt, and the necessary reclassifications that might follow. The issuance of the new proposed DOL rule provides an explanation for the audit, without any implication by the employer that there have been prior misclassifications.