12/20/2016: “Exempt” is Over – A Review of the New Regulations for “Overtime-Ineligible” Employees
As featured in Behind the Wheel, a quarterly publication of the Maryland Motor Truck Association.
Written by Franklin & Prokopik attorneys Albert B. Randall, Jr. and Matthew George Kuspa
Editor’s note: On November 22, 2016, just as this magazine issue was being printed, a federal judge issued a preliminary injunction that temporarily halts implementation of the overtime rule discussed below. The injunction, coupled with the outcome of the U.S. elections, places the rule in doubt. Until such time as the injunction is lifted, the December 1 implementation date is temporarily suspended.
The U.S. Department of Labor (“DOL”) has issued new overtime regulations which are currently scheduled to go into effect on December 1, 2016. In Maryland alone, an estimated 79,630 currently nonexempt employees (1.9% of the working population) will become entitled to overtime under the new regulations.
Under the old regulations, executive, administrative, or professional employees (EAPs) were generally “exempt” from overtime if they performed certain job duties (the “duties test”) and were paid a salary (the “salary basis” test) of not less than $455 per week (the “salary level” test). Highly compensated employees (HCEs) were exempt from overtime if they were paid at least $100,000 and passed a “minimal duties” test, meaning that they customarily and regularly performed at least one of the exempt duties of an exempt EAP.
Under the new regulations, the DOL will now refer to nonexempt employees as “overtime-protected” or “overtime-eligible,” and exempt employees will be referred to as “overtime ineligible” or “not overtime-protected.” The new regulations do not make any changes to the duties tests for either EAPs or HCEs, however, the salary levels will be raised substantially for both overtime-ineligible EAPs and HCEs. Finally, in meeting the new standard salary level for overtime-ineligible EAPs, employers will be allowed to include nondiscretionary bonuses and make “catch-up” payments as needed.
Raising the Salary Levels
The DOL has set the new “standard salary level” for EAPs at the 40th percentile of full-time salaried workers in the lowest-wage Census Region in the United States. Based on data from 2015, the standard salary level will increase from $455 per week to $913 per week (or from $23,660 per year to $47,476 per year), effective December 1, 2016.
The salary level for HCEs will also change, and will now be set to the 90th percentile of full-time salaried workers nationally. Based on census data from 2015, the new salary level for HCEs will be $134,004, also effective December 1, 2016.
Part of the purpose of tagging the salary levels to census data is to allow for “automatic updates” to the salary levels for EAPs and HCEs. The first update to the salary levels will take effect on January 1, 2020, and salary levels will be updated every three years thereafter. The DOL will calculate the new salary levels based on data from the second quarter of the year preceding the update, and will post the new salary levels at least 150 days prior to each update (or August 4th of the preceding year).
Bonuses and “Catch-Up” Payments
Employers are now permitted to count nondiscretionary bonuses, incentives, and commissions toward up to 10% of the standard salary level for overtime-ineligible EAPs. Examples of such “nondiscretionary” payments include bonuses that are announced to employees to encourage them to work more steadily, rapidly, or efficiently (in other words, bonuses tied to productivity or profitability), and bonuses designed to encourage employees to remain with the employer. Examples of “discretionary” bonuses include unannounced bonuses or spontaneous rewards for specific acts.
In order to be counted toward the standard salary level, nondiscretionary bonuses must be paid at least quarterly. In some situations, the bonuses may be less than expected and an EAP’s weekly salary plus bonuses for the quarter will not equal or exceed one-quarter of the yearly salary level. In such a case, the DOL will permit employers to make a “catch-up” payment no later than the pay period after the end of the quarter to raise the employee’s salary to the standard salary level.
Motor Carrier Exemption
Section 13(b)(1) of the Fair Labor Standards Act, also known as the “motor carrier exemption,” continues to provide an overtime exemption for employees regulated by the Department of Transportation (DOT). Drivers who transport goods across state lines and certain other employees whose duties may affect the safety of motor vehicles in interstate commerce generally fall within DOT jurisdiction and are not entitled to overtime under FLSA, even if they also work on intrastate routes. The new regulations do not affect the motor carrier exemption. Under Maryland law, state overtime law does not apply to employees regulated by the Department of Transportation.
Options for Employers
Employers may increase the salary of newly overtime-eligible employees to keep the employee exempt from overtime. This may be a good option for employees who have salaries slightly under the new exempt salary level.
Employers may also choose to keep salaried employees that will now be overtime-eligible at the same rate of pay and pay overtime as needed. There is no requirement that employers convert employees from salaried to hourly in order to pay overtime. Employers may instead calculate an employee’s rate of pay by dividing the total pay for the employee in any workweek by the total number of hours actually worked, and use that rate to pay the salaried employee overtime.
Preparing for the Change
In preparing for the change on December 1, 2016, employers should consider:
- Identifying employees who are at or near the new standard salary level,
- Preparing early by having salaried employees who are newly “overtime-eligible” track their time in anticipation of the change,
- Developing policies for tracking time for employees who work remotely and/or are issued a company computer or cell phone, and
- Evaluating bonuses to determine whether they are “discretionary” or “nondiscretionary” and reviewing and adjusting their compensation schemes and policies accordingly.
Private employers may also refer to guidance issued by the DOL on the final overtime rule (available at https://www.dol.gov/). Whether employees are “exempt,” “overtime ineligible,” or “not overtime-protected,” employers will have to pay much closer attention to employee compensation and overtime work as the regulations continue to update.
What does this mean for employers? For now, the overtime rule will not take effect as planned on December 1, 2016 but it could still be implemented at some point in the future. Employers may continue to follow the existing overtime regulations until a final decision is reached, but should be aware that there is a possibility that the rule could be enforced retroactively, and should carefully track the hours of employees who will be affected by the changes. Those employers who have already reclassified employees have the option of proceeding forward with implementation of the new rules.