BUSINESS NEWS: New Overtime Rule From The U.S. Department of Labor

Most Texas employers are covered by the nation’s main wage payment law known as the Fair Labor Standards Act (FLSA), which, among other things, controls minimum wage and overtime pay for most employees of private and public employers in Texas.

One of the biggest concerns employers have under the FLSA is which employees qualify as salaried employees exempt from overtime pay and which do not.

For most “white collar” overtime exemptions, the employee must be paid a minimum salary and meet certain tests for the kinds of duties they perform. Those requirements have been the same since 2004.

On Monday, May 16, 2016, the White House issued a press release along with the DOL regarding the new minimum salary requirements for the white-collar overtime pay exemptions.

The DOL announcement is online at www.dol.gov/whd/overtime/final2016/. That same web page also contains links to more detailed information from DOL on the new changes.

According to that announcement, the new minimum salary for salaried exempt employees will increase from the current level of $455 per week to the new level of $913 per week ($47,476 per year) starting on December 1, 2016.

The DOL had originally publicized an effective date of July 1, 2016 or thereabouts, but they decided to give employers more time to prepare for the rather substantial changes. The new minimum salary for highly compensated employees (easier test to meet for an exemption to apply) will increase to $134,004 per year at the same time.

The new regulation also contains a procedure for automatically increasing those minimum salary levels every three years, starting on January 1, 2020, according to the same criteria that were used to establish the new salary amounts for this year.

Here is what the DOL fact sheet explaining the automatic increase procedure indicates on that: “… the Department will update the standard salary level to maintain it at the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census Region [the southern U.S.], and the Department will update the HCE [highly compensated employee] total annual compensation level to maintain it at the annual equivalent of the 90th percentile of earnings of full-time salaried workers nationwide.”

The new rule provides that bonuses and commissions can constitute up to 10 percent of the required salary amount, as long as the commissions or bonuses are paid on at least a quarterly basis. Further details are explained in the DOL guidance at the following link: www.dol.gov/whd/overtime/final2016/faq.htm#N1.

Accordingly, if the guaranteed salary plus commissions and/or bonuses equal at least $913 per week, and the salary makes up at least 90 percent of that amount, then the compensation will meet the new requirements for a salaried exempt employee.

The new regulation will not change the duties tests for the various exemption categories. Those remain the same, meaning that they will continue to apply in general to the highest-ranking employees (executive and administrative leaders within the company), or to those who have college degrees for the work they do and who usually have licenses from the state to practice their professions (learned professionals).

The exemptions also continue to include outside sales representatives and computer professionals (programmers, network engineers, webmasters, and the like).

The official definition of “highly compensated employee” (HCE) is found in DOL regulation 29 C.F.R. §541.601(a), which is online at www.twc.state.tx.us/news/efte/wh_part541.html#541_601.

Starting December 1, 2016;

• HCE must receive total annual compensation of at least $134,004, which can include salary, commissions, non-discretionary bonuses, and other non-discretionary pay (see subsection (b)(1)).
• The total can include a final, post-year payment if it is made within one month of the end of the year (see subsection (b)(2)).
• Partial years can have pro-rata amounts corresponding to the HCE minimum compensation (see subsection (b)(3)).
• The employee must perform at least one of the exempt duties of an executive, administrative, or professional employee (see subsection (c)).
• The employee’s primary duty must fall into the category of office or nonmanual work (see subsection (d)).

As to which employees might fall into the category of HCE, based on the wording of 29 C.F.R. §541.601, the term would certainly include the president or CEO of a company, but could also include well-paid top managers at companies who do not necessarily have hiring and firing authority, but still supervise two or more full-time employees. Those would be department or division managers, primarily, with regard to the executive exemption.

By the same token, HCE might also apply to non-supervisory employees whose non-manual duties are important enough to merit the high pay (administrative exemption). No matter what, a professional-exempt employee’s “primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.”

In the DOL’s Notice of Proposed Rulemaking (https://www.gpo.gov/fdsys/pkg/FR-2016-05-23/pdf/2016-11754.pdf (starting on pg. 126)), the agency included a table of occupational codes with probability codes assigned for likelihood of exemption. In general, a job category with Code 1 would be an easy one to classify as exempt with the payment of the required salary. A probability Code of 2 would be less likely, although if a Code 2 employee is also highly compensated, the likelihood of the exemption applying would increase significantly.

There are a few interesting exceptions to the salary test for exempt employees. First, there is the “business owner” exception: an employee who is actively engaged in the management of the company and owns at least 20% of the company does not need to be paid on a salary basis (www.twc.state.tx.us/news/efte/wh_part541.html#541_101).

Second, the so called “classic professions”–doctors, lawyers, and teachers–are subject to an exemption from the salary requirement (www.twc.state.tx.us/news/efte/wh_part541.html#541_304 and www.twc.state.tx.us/news/ efte/wh_part541.html#541_303).

Third, administrators at educational institutions are exempt from the salary requirement if they are given the same salary as entry-level teachers at their schools (www.twc. state.tx.us/news/efte/wh_part541. html#541_600).

Fourth, outside sales representatives do not have to be paid a salary (www.twc.state.tx.us/news/efte/wh_part541.html#541_500).

In view of the upcoming changes to the salary requirements, the bottom-line considerations for employers will be the following:

• Carefully analyze which positions meet the duties tests for white-collar exemptions and which do not.
• For currently exempt positions in which it will not be possible to pay the new minimum salary, those employees will become non-exempt, and the employer will have to track and pay for all hours they actually work, just as they do for the employees who are paid overtime.

Employers should also pay close attention to DOL wage and hour developments at www.dol.gov/whd/index.htm and look out for changes that might come in the duties tests for the various exemption categories.

Submitted by Texas Workforce Solutions

With credit to William T. (Tommy) Simmons, Legal Counsel to Commissioner Ruth R. Hughs