Employers pay overtime to employees based on their employment status according to the Fair Labor Standards Act (the federal wage and hour law). Employees who are entitled to overtime pay are called “nonexempt” employees; those who are not entitled to overtime pay are called “exempt” employees. Over the years, there has been some confusion—especially concerning executive and administrative employees—about who is covered under the Act and is, therefore, entitled to overtime pay.
On August 23, 2004, the U. S. Department of Labor (“DOL”) revised the regulations defining the “white collar” exemptions to the Fair Labor Standards Act. “White collar exemptions” deal with executive, administrative and professional employees. The 2004 changes in the regulations were intended to simplify the definition of the exemption.
On May 18, 2016, the DOL further revised the white collar exemptions. This time they made a major change in the minimum salary threshold for the exemptions to apply.
Q: Has the basic structure of the tests to meet the exemptions changed?
A: No. To prove a particular employee is exempt from the overtime requirements of the Act, an employer still must show that:
the employee is paid on a salaried basis;
the salary meets regulation requirements; and
the employee’s duties meet the requirements.
Q: When is the employee paid on a salaried basis?
A: An exempt employee must regularly receive a “pre-determined” salary amount that may not be reduced “because of variations in the quality or quantity of work performed.” With a few identified exceptions, a salaried employee must receive this predetermined amount in any week he or she performs any work.
One important exception is “docking.” Under the regulations, an employer may “dock,” for one or more full days, the pay of an otherwise “exempt” or salaried employee who breaks written workplace conduct rules (for example, by violating major safety rules or engaging in sexual harassment or workplace violence).
Q: What salary amount is high enough for an employee to be considered “exempt”?
A: The 2004 regulations eliminated the “short” and “long” tests for determining who has “exempt” status and established a $23,660 annual salary ($455/week) as the benchmark for the exemption. The 2016 regulations significantly changed these amounts. Effective December 1, 2016, the annual salary must be $47,476. So, to be considered exempt, an employee must be paid at least a $913/week salary and “customarily and regularly” perform one or more exempt duties or responsibilities to qualify as an exempt executive, administrative, or professional employee.
After 2016, the minimum salary threshold will automatically be adjusted every three years beginning January 1, 2020. The DOL will post this figure and publish it in the Federal Register at least 150 days prior to the effective dates, which means that in the future, employers will have approximately five months’ notice of the new minimum salary threshold.
The 2004 regulations also established a new category, the “highly compensated employee,” defined as someone earning at least $100,000 per year. The 2016 regulations raised this amount to $134,004 per year. Prior to 2004, a highly paid employee who met certain criteria could be eligible for overtime. For example, the department head of a retail store may have qualified for overtime if, in addition to managing, he or she spent more than 20 percent of the time selling. Now, such an employee earning $134,004 or more would be exempt, regardless of the amount of time spent on ordinarily “non-exempt” tasks. The highly compensated employee exemption amount will also be adjusted every three years.
Similarly, the 2004 regulations recognize that a “business owner,” someone who has at least 20 percent equity interest in the enterprise he or she is actively managing, is not due any overtime compensation, even if he/she meets the salary test requirements. The business owner exemption remains unchanged by the 2016 regulations.
Highly paid “blue collar” employees such as non-management-level building construction employees are always non-exempt no matter how highly they are paid. Similarly, emergency responders such as police officers and firefighters are specifically excluded from these regulations “regardless of rank or pay level.”
Q: When do an employee’s duties trigger the executive exemption?
A: To be considered an exempt “executive,” an employee must:
have the primary duty of managing the enterprise or one of its recognized departments or subdivisions;
customarily and regularly direct work of two or more employees;
have the authority to hire and fire other employees or to make influential recommendations.
The regulations recognize the concept of “concurrent duties,” those that fall into both “exempt” and “nonexempt” categories. Therefore, an employee who performs typically nonexempt tasks while managing an enterprise still can be considered an “exempt” employee. For example, an assistant manager at a fast food restaurant can be considered an exempt employee even though he or she is taking orders and serving customers as well as managing.
Q: When do an employee’s duties trigger the administrative exemption?
A: For an employee to be exempt as an “administrative employee,” he or she must:
have the primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers (such as work in the areas of tax, finance, accounting, quality control, purchasing, marketing, human resources, employee benefits and similar activities); and
customarily and regularly exercise discretion and independent judgment (meaning that the employee is involved in comparing and evaluating possible courses of action, and making decisions that involve judgment, and not simply following established procedures or standards). Positions requiring independent judgment include insurance claims adjusters who investigate and evaluate claims and negotiate settlements, financial service employees who evaluate clients’ assets and determine which financial products meet their needs and executive/administrative assistants who, without specific instructions, deal with significant matters.
6/30/2016This "Law You Can Use" legal information column was provided by the Ohio State Bar Association. It was prepared by attorney Thomas H. Barnard of the law firm Ogletree Deakins Nash Smoak & Stewart, PC.