NACE Journal, February 2020
On January 1, 2020, millions of people became eligible for overtime. It is imperative that employers and employees understand the new overtime rules and requirements going forward.
The FLSA and the Exempt Employee
To understand the new rules and requirements, it is necessary to have some background information on where the rules came from and why the changes are so important. The Fair Labor Standards Act (FLSA) is the federal law that provides employers with the rules that pertain to properly paying employees. Most employees must be paid at least minimum wage for all hours worked and overtime pay of time and one-half an employee’s regular rate of pay for all hours worked above 40 in a given workweek. The bigger of the two foregoing issues is the payment of overtime to eligible employees.
There are, however, exceptions to that general rule. For example, the rules only apply to “employees.” Accordingly, if an individual is an independent contractor or an unpaid intern (an issue that has been discussed in prior articles and that continues to be a problem for employers) he or she is not provided with the protections of the FLSA, and an employer is not required to provide payment in accordance with its rules and regulations.
Another way employers can avoid paying overtime to employees is to classify them as exempt under the law. The FLSA establishes certain exemptions for employees based upon their job duties and compensation. The three primary exemptions are the administrative, professional, and executive exemptions; however, there are additional exemptions for outside sales employees and computer professionals.
Focusing on the three primary exemptions, in order for an employee to be classed as exempt, the individual must be paid a certain salary and must perform certain duties. For an employee to satisfy the duties part of the administrative exemption, 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 must include the exercise of discretion and independent judgment with respect to matters of significance.
For an employee to satisfy the executive exemption, 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 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 must be given particular weight by the employer.
To be clear, an employee’s job title does not matter when determining if the individual is exempt. If an employer provides an employee with the job title of “president,” but the individual spends the day filing documents and cleaning floors, that person is considered non-exempt under the FLSA and entitled to overtime. It should also be noted that the exemptions only apply to “white-collar” employees and do not apply to manual laborers or other “blue-collar” workers who perform work involving repetitive operations with their hands, physical skill, and energy.
The Salary Threshold
Meeting the duties portion of the exemption test is just one part of the test to determine if an employee is exempt. The other factor that must be met is the salary basis threshold. As of January 1, 2020, this threshold has been increased by the U.S. Department of Labor (DOL) for the first time in decades.
Prior to January 1, 2020, the minimum salary to establish an employee as exempt was $455 per week, which equates to $23,660 annually. As of January 1, 2020, however, that minimum threshold amount was increased to $684 per week, which equates to $35,568 annually. The DOL estimates that the extra $229 per week will render approximately 1.3 million additional workers eligible for overtime.
This is not the first time the DOL attempted to alter the minimum salary threshold. In 2016, under President Obama, the DOL attempted to raise the minimum salary to $913 per week—$47,476 per year. This proposal, however, was ultimately overturned by the courts and the issue was not revisited until recently.
Of note: An employer is permitted to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement, provided that the foregoing compensation is paid to employees on at least an annual basis. For example, an employer can use guaranteed bonuses tied to an employee’s (or the company’s) productivity to satisfy a portion of the minimum salary requirement.
Job Functions Not Impacted by the Change in Rules
There are special positions and job functions that remain exempt and are not impacted by the change to rules. One such position is a teacher. A teacher is exempt, regardless of the person’s minimum salary, if the individual’s primary duty is teaching, tutoring, instructing, or lecturing to impart knowledge, and the individual is performing that duty as an employee of an educational establishment. Of note: An individual who teaches online or remotely also may qualify for this exemption. A teacher does not become nonexempt merely by participating in extracurricular activities.
Another special exemption position is an athletic coach. An athletic coach qualifies as an exempt teacher—regardless of the level of pay—if the individual’s primary function is instructing student-athletes. Coaches who have a primary function of recruiting and conducting interviews of students, however, do not qualify for this exemption. As such, unless these recruiting coaches are being paid $684 per week and can satisfy one of the other aforementioned exemptions, they will have to be paid at least minimum wage and overtime pay for all hours worked over 40 in a workweek.
Overtime Rules and Student Workers
One additional issue that educational institutions in particular are presented with is the matter of student workers. While most students do not work more than 40 hours in a given week, thereby rendering the issue of overtime moot, the matter cannot be ignored. Specifically, issues arise with graduate teaching assistants, research assistants, and residential assistants.
With regard to graduate teaching assistants, provided the individual’s primary role is teaching, the teaching assistant will be considered exempt under the teacher exemption stated herein. If the teaching assistant does not do much teaching, but does menial tasks such as filing, getting the professor coffee, or cleaning the classroom, that individual will likely not satisfy the teacher exemption. Accordingly, unless the individual is being paid $684 per week and can satisfy one of the other aforementioned exemptions, the person will have to be paid at least minimum wage and overtime pay for all hours worked over 40 in a workweek.
Research assistants also set forth an interesting dynamic under the law. Given the fact that a research assistant is likely to fill an educational role underneath a faculty member’s supervision, such a position would not be considered an employment relationship. Accordingly, because the individual is not an employee, there is no need to fulfill the requirements of the FLSA and the overtime rule is not an issue.
Finally, students who perform duties as residential assistants and receive room, board, or tuition credits in exchange for their services are also not generally considered employees under the FLSA. As such, the overtime rules would not impact these positions. If, however, the student would receive compensation from the educational institution that is not generally part of the education program (payment of a wage for performing the services), the role changes to one of an employee. Accordingly, the new overtime rules would apply and the institution must ensure it is paying the individual properly.
In light of the new rules, what should employers and employees be mindful of going forward?
As an initial matter, employers must evaluate each job function to ensure that its employees are classified properly. If an employee is currently exempt and is making less than $684 per week, the employer has two options—raise the employee’s salary to equal $684 per week or make that employee non-exempt. Employers must also evaluate their current job descriptions and practices related to timekeeping. In this regard, are non-exempt employees permitted to use a smart device for company purposes or do they handle company email after regular working hours? If so, that is likely compensable time, which may result in the payment of overtime.
Employers must also train their supervisors to handle issues of unauthorized overtime and improper timekeeping. Employers should also ensure that the changes are communicated properly to their employees to avoid potential issues down the road.
For their part, employees must be mindful of whether they are being paid properly and if their exempt/non-exempt status is correct.
Both the FLSA and most state laws provide for significant penalties to employers if they fail to pay their employees properly, including back pay for either two or three years, liquidated damages, and attorneys’ fees. As such, it is imperative that employers (and employees) know their rights and remedies.