What does President Obama’s direction to the Department of Labor to change the FLSA’s “salary-level test” for exempt employees mean for employers?
If enacted as proposed, it means that if (after the amendment goes into effect) an employee is not being paid at least $50,440 annually, the employee will lose the exempt status even though that employee satisfies both the “duties test” and the “salary-basis test.” Once that happens, the employer will be required to not only ensure that the employee is being paid at least minimum wage for all hours worked, but will also be required to pay the formerly-exempt employee overtime compensation for all hours worked in excess of 40 hours in a work week.
The employer will be faced with the choice of either giving the affected employee an immediate raise, or treating, and paying, that employee as a non-exempt employee, which includes overtime pay. Either way, it is important that all employers maintain their awareness of when this amendment is implemented, and what the final rule will be. Otherwise, an uninformed employer can quickly become a named defendant. The DOL estimates that over 4.5 million employees currently identified as “exempt” employees could be immediately affected by this amendment.
In June 1938, President Franklin D. Roosevelt signed the Federal Labor Standards Act of 1938 (“FLSA”) into law. In the over seventy-five years since its passage, the FLSA has been amended and expanded numerous times. In 2014, President Obama suggested a change to the FLSA’s “salary-level test” for exempt employees. This change could affect thousands of employers and millions of employees. The proposed amendment is currently in the “proposed rule stage” within the Department of Labor.
Among other things, the FLSA provides for a federal minimum wage and for overtime pay for non-exempt employees.[1]
Every employer shall pay to each of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods, wages at the … rate [of] $7.25 an hour….[2]
[N]o employer shall employ any of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.[3]
However, the FLSA provides that certain employees are exempt from the FLSA’s minimum wage and overtime compensation requirements (for example, employees employed in a bona fide executive, administrative or professional capacity). With certain specific exceptions (like physicians, lawyers and outside sales workers), before an employee will be considered “exempt,” the employer must show that the employee satisfies the “salary-level test,” the “salary-basis test” and the “duties test.”
To satisfy the “duties test,” the employer must show that the actual duties of the employee satisfy the requirements of the claimed exemption. For example, for an employee to satisfy the “duties test” for the administrative exemption, the employer must show that the employee’s “primary duty is 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.”[4]
To satisfy the “salary basis test,” the employee must be paid a predetermined amount, which is not subject to reduction based on quality or quantity of work performed.[5] The Code of Federal Regulations provides:
An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to the exceptions provided in paragraph (b) of this section, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.
Finally, for an employee to be considered exempt from the federal minimum wage and overtime provisions, the employee must satisfy the “salary-level test.” In 1938, in order to satisfy the “salary-level test” for executive and administrative employees, the employee had to be paid at least $30 per week. While the FLSA has been amended numerous times over the past 75 years, the “salary-level test” has seen only a limited number of amendments, with the last being in 2004. Under the current standards, in order to meet the “salary-level test,” the employee must be paid at least $455 per week ($910 biweekly or $1971.66 monthly). This equates to an annual salary of $23,660.
An employee who meets all of these tests is exempt from the minimum wage and overtime requirements of the FLSA (and more than likely the State equivalent). In other words, the employer of an employee who is found to be an exempt employee is not required to determine whether the employee is receiving the required minimum wage for all hours worked, nor is the employer required to pay the employee overtime wages for hours in excess of 40 hours in any workweek.
President Obama’s direction to the Department of Labor (“DOL”) is for the DOL to implement new rules to increase the minimum salary required to meet the “salary-level test.” Under the current proposal issued by the DOL, the DOL proposes to increase the minimum level from $455 per week to $921 per week ($47,892 annually). However, this amount is based upon the standard salary level equal to the 40th percentile of earnings for full-time salaried workers in 2013. The final level is likely to be set at $970 per week ($50,440 annually) based upon the 40th percentile weekly wage for a full-year worker in 2015.
What does this mean for employers? It means that even if the employee satisfies both the “duties test” and the “salary basis test,” if, (after the amendment goes into effect) the employee is not being paid at least $50,440 annually, the employer will be required to ensure that the employee is being paid at least the minimum wage for all hours worked, and, also, that the employee is paid overtime compensation for all hours worked in excess of 40 in a work week. It will require employers to either provide the affected employee with an immediate raise, or begin treating, and paying, the affected employee as a non-exempt employee, including paying overtime compensation.
Carlson Dash’s attorneys can assist you in not only staying on top of the DOL’s proposed changes, but in keeping you in compliance with the FLSA. If you have any questions regarding the status of your employees, let us assist you.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
[1] Each state, including Illinois, has statutes that relate to minimum wage and overtime payments for employees in that state. Generally, states follow the FLSA when addressing the status of exempt employees. See, e.g., 820 ILCS 105/4a.
[2] 29 U.S.C. § 206(a)(1)(c). The State Minimum Wage in Illinois is $8.25. The minimum wage in Chicago is currently $10.00 increasing to $13.00 by July 1, 2019.
[3] 29 U.S.C. § 207(a)(1)
[4] 29 C.F.R. § 541 .200(a)(2)-(3)
[5] 29 C.F.R. § 541 .602(a)
