Current and proposed overtime pay exemption rules

Current and proposed overtime pay exemption rules

Getting to the bottom line

With Dannible & McKee LLP

The Fair Labor Standards Act (FLSA) requires that most employees be paid overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from overtime pay for executive, professional, outside sales and certain computer employees. This article will place an emphasis on the exemption for executive and administrative employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis that meets a minimum weekly requirement.

It is important to note the exemptions provided by FLSA Section 13(a)(1) apply only to “white collar” employees who meet the salary and job duties tests. The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. FLSA-covered, non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, other construction workers and laborers are entitled overtime premium pay under the FLSA. They will not be exempt regardless of how highly paid they might be.

On March 7, 2019, the Department of Labor announced a proposed rule that would make an estimated 1.1 million more American workers eligible for overtime.

Under currently enforced law, employees with a salary below $455 per week ($23,660 annually) must be paid overtime if they work more than 40 hours per week. Workers making at least this salary level may be eligible for overtime based on their job duties. This salary level was set in 2004.

This proposal would boost the standard salary level to $679 per week (equivalent to $35,308 per year). Above this salary level, eligibility for overtime varies based on job duties.

The overtime pay exemption will apply for each respective employee that meets both the salary requirement described above ($455/$679 per week under new/proposed law) and the following job duty criteria:

Executive employee

• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees.

Administrative employee

• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Highly Compensated Employees

Under the currently enforced law, highly compensated employees (HCEs) performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

Under the proposed law from March 7, 2019, the total annual compensation requirement needed to exempt HCEs increases from $100,000 to $147,414 (which must include at least $679 per week paid on a salary basis).

As indicated above, the exemptions do not apply to manual laborers or non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen or other construction workers. As a result, a non-management employee could make in excess of $100,000 ($147,414 under the proposed law) and still be eligible to receive overtime pay.

Key Provisions of the Proposed Rule

The proposed rule focuses primarily on updating the salary and compensation levels needed for workers to be exempt. Specifically, the department proposes to:

1) Increase the standard salary level to $679 per week (the equivalent of $35,308 annually for a full year worker), up from the currently enforced level of $455 per week;

2) Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to $147,414 annually, up from the currently enforced level of $100,000 annually; and

3) Allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level, provided these payments are made on an annual or more frequent basis.

4) A commitment to periodic review to update the salary threshold.

5) No changes in overtime protections (always entitled to receive overtime pay) for:

a) Police officers

b) Firefighters

c) Paramedics

d) Nurses

e) Laborers, including non-management production-line employees

f) Non-management employees in maintenance, construction and similar occupations

The Department of Labor is undertaking rulemaking to revise the regulations that govern the exemption of executive, administrative and professional employees from the FLSA’s overtime pay requirements. Until the department issues its final rule, it will enforce the regulations in effect on Nov. 30, 2016, including the $455 per week standard salary level.

If you have any questions or would like more information regarding this topic, call us. We would be happy to assist you.

Shawn T. Layo, CPA, is a tax manager with Dannible & McKee LLP, a Syracuse, NY-based public accounting firm. The firm has specialized in providing tax, audit and accounting services since its inception in 1978. For more information on this topic, contact them at 315.472.9127 or visit www.dmcpas.com .

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