The U.S. Department of Labor announced last week that, starting December 1, 2016, revised overtime exemption rules in the Fair Labor Standards Act would go into effect. Specifically, the “salary level” for the white-collar overtime exemption would increase from $455 per week (for an annual salary of $23,660) to $913 per week (for an annual salary of $47,476).
The “white-collar” exemption exempts employers from having to pay overtime (or time-and-a-half) to employees for every hour worked over 40 hours in a workweek, provided that the employee is employed in a “professional”, “administrative”, or “executive” capacity, and meets three tests:
- the “salary basis” test: simply, that the employee is paid a salary or fee, rather than paid an hourly wage
- the “salary level” test: that they are paid at least the new salary discussed above
- the “standard duties” test: varies depending on the capacity the employee is employed in:
- for “executive”: the primary duty must be managing the enterprise or a customarily-recognized department or subdivision of the enterprise comprising at least 2 full-time employees
- for “administrative”: the primary duty must be the performance of office or non-manual work directly related to the management or operations of the employer or the employer’s customers, and must also include the exercise of discretion and independent judgment with respect to matters of significance. Certain academic administrative personnel are exempt from the salary level requirements.
- for “professional”: the primary duty must be the performance of work that requires advanced knowledge in a field of science or learning (usually requiring a degree) or that requires invention, originality, or talent in a recognized field of artistic or creative endeavor. Doctors, lawyers, and teachers are specifically exempt from the salary level requirements
The DOL also raised the annual salary level for the “highly compensated employee” exemption (subject to a less stringent duties test) from $100,000 to $134,004.
The salary levels for both the white collar and highly-compensated employee exemptions will now also automatically increase every three years based on inflation.
The FLSA itself only applies to companies that have annual gross revenue of $500,000 or more; companies that are hospitals, residences providing medical or nursing services, or schools are subject to the FLSA regardless of gross revenue. Additionally, regardless of the company’s revenue, employees whose work involves interstate commerce are also subject to the FLSA.
If your startup or your employees are subject to the FLSA and you are currently relying on the white-collar or highly-compensated employee exemptions, you will want to confirm if the salaries you pay to those workers now fall below the new salary level requirements. If so, you have two options: one, increase salaries to the new requirements, or reclassify the employees as non-exempt and begin tracking their hours worked in order to pay overtime if necessary. If you decide to reclassify employees as non-exempt, you can either choose to pay overtime, or control the hours employees work and redistribute them to ensure employees don’t work overtime (including hiring more workers if there is more work than can be handled by your current workforce in a 40-hour week).