flsa overtime rule changes: preparing for compliance

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FLSA Overtime RuleEffective December 1, 2016

IntroductionSuzanne Sentman• McKonly & Asbury• Human Resource Director• [email protected]

John Martin• Rhoads & Sinon• Partner• [email protected]

March 2014 Presidential Memorandum• Directed the DOL to update the overtime regulations:• To reflect the intent of the Fair Labor Standards Act.• To simplify and modernize the rules so they’re easier for workers and

businesses to understand and apply.

Background• Fair Labor Standards Act (1938)

• Guarantees a minimum wage for all hours worked.• Limits the number of hours an employee can work without additional

compensation to 40 hours per week. • Some employees are “exempt” from minimum wage and overtime pay

protections. Section 13 (a)(1): “Any employee employed in a bona fide executive, administrative, or professional capacity.” • Exemption based on the belief that EAP workers “typically earn salaries well

above minimum wage and enjoy other privileges, including above-average fringe benefits, greater job security and better opportunities for advancement, setting them apart from workers entitled to overtime pay.”

White-Collar Exemption: Three Part Test1. Salary Basis Test: Employee must be paid a predetermined and fixed salary that is not subject to

reduction because of variations in the quality or quantity of work performed.2. Salary Level Test: The amount must meet a specified amount. 3. Duties Test: The job duties must primarily involve executive, administrative, or professional

work (EAP).• The DOL has long recognized that the salary level test is the best single test of exempt status for

white collar employees. • If left at the same amount over time, the effectiveness diminishes as the wages of employees

increase and the real value of the salary threshold falls. • DOL has raised threshold over the years, most recently in 2004: $23,660 annually ($455 per week). This

current threshold is below poverty level for family of four; only 8% of full-time workers fall below it.

• The final rule ensures that “white collar employees who should receive extra pay for overtime hours will do so and that the test for exemption remains up-to-date so future workers will not be denied the protections that Congress intended to afford them.”

What is the New FLSA Overtime Rule?• Effective December 1, 2016 overtime protections will be extended to

those not currently eligible under federal law (as many as 4.2 million).• Workers earning less than $47,476 annually ($913 weekly) will have to

be paid overtime even if they are classified as manager or professional. • The DOL will increase the salary threshold every three years. The first

update, January 1, 2020 will most likely increase the threshold to more than $51,000.• Employers must comply with new regulations by December 1.

Other Changes in the Rule• Duties test untouched!• Sets the total annual compensation requirement for highly

compensated employees (HCE) subject to a minimal duties test to the annual equivalent of $134,004 (90th percentile).• HCE exemption is not recognized in PA• Allows non-discretionary bonuses, incentives and commissions to

count toward up to 10% of the required salary threshold to meet the exemption, provided employers pay those amounts on a quarterly or more frequent basis. Examples: production goal bonuses, retention bonuses and commissions based on a fixed formula.

Non-Discretionary Bonuses, Incentives, and COmmissionsExample: Quarter 1 (Jan, Feb, Mar) employee must receive $821.70 per week in salary (90% of $913). The remaining $91.30 per week would be paid as non-discretionary bonuses, incentives or commissions. • “Catch-up” payment: If at the end of the quarter the employee has not

received $91.30 per week the employer has one additional pay period to pay the employee a lump sum (no greater than 10% of the salary level) to meet the minimum salary test. • If employer chooses not to make catch-up payment, employee would be

entitled to OT for any hours worked in Quarter 1.Non-discretionary bonuses must be included in OT calculations!

What Can’t Be Counted• Discretionary bonuses • Payments for medical, disability or life insurance • Contributions to retirement plans • Other fringe benefits, such as payments to a bona fide profit sharing

plan or trust

Salary Plus Overtime for Those Below $47,476An employer might pay employees a salary for the first 40 hours of work per week, and then pay overtime for any hours over 40 Example…• Amy, a budget director at a college, earns a fixed salary of $41,600 per

year ($800 per week) for a 40 hour work week. Amy’s regular rate is $20 per hour. If Amy works 45 hours one week, the employer would pay time and one-half for five hours at a rate of $30/hour. • Amy should be paid $950, consisting of her $800 per week salary and

$150 overtime compensation.

Other Businesses / Industries Affected?• Non-Profits are affected two ways:• Enterprise Coverage: Not covered by FLSA unless they engage in ordinary

commercial activities that result in sales or business of $500K or more per year. • Individual Coverage: Employees who are engaged in interstate commerce are

covered by the FLSA! • Interstate commerce: making telephone calls, sending emails or writing letters to

someone in another state, credit card transactions, or ordering or receiving goods from an out-of-state vendor.

• It is possible for an organization to be exempt from the FLSA under the enterprise coverage definition but its employees covered under the FLSA individually!

Other Businesses / Industries Affected?• Educational Institutions • No changes that provide special relief for institutions of higher education. • Bona fide teachers still exempt from minimum salary requirements.

• Employees who are in administrative capacity at both non-profits and educational institutions are covered under new guidelines.

Other Businesses / Industries Affected?• Given First Amendment rights, what about churches and other

religious entities?

• Is there a “ministerial exception” to the FLSA? Sort of…

Churches and Religious Organizations• No ministerial exception to statute; however, court judges have

created it through judge-made law under our common law system. • Some positions, such as a Catholic priest or ordained minister, likely

fall within scope of “ministerial exception.”• Others are a closer call…lay administrators, office staff, maintenance

workers, secular instructors.• Caution when using ministerial exception!

Churches and Religious Organizations• Range of positions considered “ministerial” and exempt from coverage

under FLSA and/or state wage and hour laws:• Church music / choir directors• A seminarian who assists with Catholic Mass• Ordained and non-ordained Baptist seminary faculty• A Catholic diocese’s Director of Religious Formation• A Mashgiach, who supervises the kashrut status of a facility, at a Jewish nursing home• A religious hospital’s chaplain• Salvation Army administrators who led worship and had separate duties at Salvation

Army thrift shops• A Catholic nun denied tenure for a canon law professorship at Catholic University

Compliance Options…The Final Rule would have no impact on pay for those not working more than 40 hours in a workweek. For those that do…• More pay?

• Raise salaries to keep exempt status• Beware of salary compression!

• When gap closes between less experienced employees vs. experienced and supervisors/managers• Less impact to budget to pay overtime at a lower rate for select group vs. increase salary scales across board

• Reclassify as non-exempt and track hours?• Employees report hours and are eligible for overtime for hours > 40 in workweek

• Fewer hours?• Monitor schedules to avoid OT

• Adjust workload / hire employees?• Reduce schedules and spread work to others to avoid OT

Compliance Options…• Comp time as an option?• State or Local Governments• Public Agencies• NOT Private Sector Employers• Comp Time must be credited at the same rate as overtime!• No less than 1.5 hours of comp time for each hour of overtime worked

Compliance Pointers for Non-Profits and Religious Organizations• Consider employees duties. Enterprise and “ministerial” exemptions may

not apply.• Preschool or daycare teachers whose primary duties are teaching are

exempt.• The new minimum salary level is the only provision that is new.• Employees cannot “volunteer” time for same duties for which they are paid.• Comp time is not legal.• Averaging hours over a period of time is not legal. Calculations are based on

a fixed work week, seven consecutive days.

Employee Relations Issues• Change! (Those never having had to track hours or report time now

will need to...)• Employees may view non-exemption status as a demotion.• Less flexibility (i.e. longer lunches, leaving to attend a school event,

leaving early on a Friday, etc.).• OT for some; not for others in same job?? Two employees

performing the same job, but due to experience or tenure one is above the salary level of $47,476 / year and one is below. The employee making less than $47,476 is eligible for OT.

Steps for Employers to Prepare for Implementation• Review Job Descriptions and exempt vs. non-exempt duties. • Determine which employees are affected.• Analyze impact of bumping pay levels, hiring more employees to spread

out hours, downgrading some jobs to funnel exempt tasks up the ranks.• Upgrade time keeping systems to track hours.• Communicate any status changes /job duties to affected employees.• Have exempt employees who fall below $48,000/year keep a record of

their hours worked including off-hours time on electronic devices.

Employer Communication Strategies Prior to 12/11. Communication with all employees to minimize confusion2. Communication with only affected employees…

• Status changes • Exempt to non-exempt• Job duties changes• Benefit changes

• Working from home/taking work home • Responding to job-related phone calls after hours• Working through lunch • Emails—limiting outside of regular work hours or establishing a curfew • Memorializing telecommuting agreements • Addressing travel time arrangements

Resources from the DOL• Questions about travel time, on-call time, sleeping time, etc? See Fact Sheet #22: Hours

Worked• Employees at Daycare Centers and Preschools: See Fact Sheet #46• Payroll recordkeeping requirements: See Fact Sheet #21: Recordkeeping Requirements• Can you adjust the workweek? No, once established it remains fixed

• 778.105 Determining the workweek: An employee's workweek is a fixed and regularly recurring period of 168 hours - seven consecutive 24-hour periods. It need not coincide with the calendar week but may begin on any day and at any hour of the day. For purposes of computing pay due under the Fair Labor Standards Act, a single workweek may be established for a plant or other establishment as a whole or different workweeks may be established for different employees or groups of employees. Once the beginning time of an employee's workweek is established, it remains fixed regardless of the schedule of hours worked by him. The beginning of the workweek may be changed if the change is intended to be permanent and is not designed to evade the overtime requirements of the Act. The proper method of computing overtime pay in a period in which a change in the time of commencement of the workweek is made, is discussed in §§ 778.301 and 778.302.

Questions?Suzanne Sentman• McKonly & Asbury• Human Resource Director• [email protected]




and Risk Management

Questions?Suzanne Sentman• McKonly & Asbury• Human Resource Director• [email protected]




and Risk Management

www.macpas.com/collaborate2016