Changes to the Exemptions for White Collar, Professional and Administrative Employees
The Department of Labor, Wage and Hour Division published a proposed Rule on May 23, 2016, which will become effective on December 1, 2016 that will change how one compensates many of their employees effective immediately upon its effective date. Employers could be caught unaware by this change.
What is the Law Being ChangeD?The law being changed involves the characterization of employees as exempt (or salaried not subject to being paid overtime) versus non-exempt (or hourly and entitled to overtime for work performed over 40 hours per week). Traditionally, many employers have simply paid employees on a salary and took their chances, plead ignorance and if the Department of Labor came calling, paid back wages for their failure to comply as an innocent mistake. If found to be innocent, this is the remedy. However, if found to have intentionally done this, the penalties are extreme. The new law clarifies when one is exempt and when one is non-exempt so claiming ignorance is less likely to work.
The 3 Tests for Exempt EmployeesIt is easier if you simply consider every employee to be an hourly employee unless they meet an exemption to the hourly paradigm. Thus the term "exempt" employee. The three tests are (1) the employee is paid at a predetermined and fixed salary which is not subject to reduction because of variations in the quality or quantity or work performed. (No docking of pay for either quality or quantity - taking off, etc.) the "salary basis" test (2) the amount of salary paid must meet a minimum specified amount (The "salary level" test) and (3) the employee's job must primarily involve executive, administrative, or professional duties as defined but the regulations (The "duties" test).
Test One - Predetermined and Fixed Salary ChangesThe only change which might be attributable to Test 1 is that 10% of the employees fixed salary to meet the amount listed in Test 2, may be arrived at by payment of non-discretionary bonuses, incentives and commissions so long as they are paid out no less than quarterly and on a regular basis. This one change may alleviate some of the burden on employers to provide some flexibility in structuring compensation which meets the test while allowing for more incentives to employees who meet the other tests.
Test Two - Salary Level TestTest Two is where there are significant changes. The minimum salary for which an employee who meets the duties test must be paid is to be set at $923/week or $47,476 annually for a full-year worker. Further, this minimum salary will be updated every 3 years, the next increase to occur on January 1, 2020 and is estimated to be approximately $984/week or $51,168 annually. In addition, DOL sets another rate, which is intended to capture blue collar or administrative employees who are otherwise entitled to overtime but live and work in very expensive areas (e.g. NYC) is set at $134,004 and in 2020 will rise to $147,524. If an individual makes more than this amount, they need only meet one of the duties tests to be exempt, not all.
Test 3 - The Duties TestWhile there have been no changes to the Duties Test, it is probably advisable to summarize them here to make this article more usable from an historical perspective:
The duties tests.
An employee who meets the salary level tests and also the salary basis tests is exempt only if s/he also performs exempt job duties. These FLSA exemptions are limited to employees who perform relatively high-level work. Whether the duties of a particular job qualify as exempt depends on what they are. Job titles or position descriptions are of limited usefulness in this determination. (A secretary is still a secretary even if s/he is called an "administrative assistant," and the chief executive officer is still the CEO even if s/he is called a janitor.) It is the actual job tasks that must be evaluated, along with how the particular job tasks "fit" into the employer's overall operations.
There are three typical categories of exempt job duties, called "executive," "professional," and "administrative."
Exempt Executive Job DutiesJob duties are exempt executive job duties if the employee
regularly supervises two or more other employees, and also
has management as the primary duty of the position, and also,
has some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments).
Supervision means what it implies. The supervision must be a regular part of the employee's job, and must be of other employees. Supervision of non-employees does not meet the standard. The "two employees" requirement may be met by supervising two full-time employees or the equivalent number of part-time employees. (Two half-time employees equal one full-time employee.)
"Mere supervision" is not sufficient. In addition, the supervisory employee must have "management" as the "primary duty" of the job. The FLSA Regulations contain a list of typical management duties. These include (in addition to supervision):
interviewing, selecting, and training employees;
setting rates of pay and hours of work;
maintaining production or sales records (beyond the merely clerical);
appraising productivity; handling employee grievances or complaints, or disciplining employees;
determining work techniques;
planning the work;
apportioning work among employees;
determining the types of equipment to be used in performing work, or materials needed;
planning budgets for work;
monitoring work for legal or regulatory compliance;
providing for safety and security of the workplace.
Determining whether an employee has management as the primary duty of the position requires case-by-case evaluation. A "rule of thumb" is to determine if the employee is "in charge" of a department or subdivision of the enterprise (such as a shift). One handy clue might be to ask who a telephone inquiry would be directed to if the called asked for "the boss." Typically, only one employee is "in charge" at any particular time. Thus, for example, if a "sergeant" and a "lieutenant" are each at work at the same time (in the same unit or subunit of the organization), only the lieutenant is "in charge" during that time.
An employee may qualify as performing executive job duties even if s/he performs a variety of "regular" job duties as well. For example, the night manager at a fast food restaurant may in reality spend most of the shift preparing food and serving customers. S/he is, however, still "the boss" even when not actually engaged in "active" bossing duties. In the event that some "executive" decisions are required, s/he is there to make them, and this is sufficient.
The final requirement for the executive exemption is that the employee have genuine input into personnel matters. This does not require that the employee be the final decision maker on such matters, but rather that the employee's input is given "particular weight." Usually, it will mean that making personnel recommendations is part of the employee's normal job duties, that the employee makes these kinds of recommendations frequently enough to be a "real" part of the job, and that higher management takes the employee's personnel suggestions or recommendations
Exempt Professional Job DutiesThe job duties of the traditional "learned professions" are exempt. These include lawyers, doctors, dentists, teachers, architects, clergy. Also included are registered nurses (but not LPNs), accountants (but not bookkeepers), engineers (who have engineering degrees or the equivalent and perform work of the sort usually performed by licensed professional engineers), actuaries, scientists (but not technicians), pharmacists, and other employees who perform work requiring "advanced knowledge" similar to that historically associated with the traditional learned professions.
Professionally exempt work means work which is predominantly intellectual, requires specialized education, and involves the exercise of discretion and judgment. Professionally exempt workers must have education beyond high school, and usually beyond college, in fields that are distinguished from (more "academic" than) the mechanical arts or skilled trades. Advanced degrees are the most common measure of this, but are not absolutely necessary if an employee has attained a similar level of advanced education through other means (and perform essentially the same kind of work as similar employees who do have advanced degrees).
Some employees may also perform "creative professional" job duties which are exempt. This classification applies to jobs such as actors, musicians, composers, writers, cartoonists, and some journalists. It is meant to cover employees in these kinds of jobs whose work requires invention, imagination, originality or talent; who contribute a unique interpretation or analysis.
Identifying most professionally exempt employees is usually pretty straightforward and uncontroversial, but this is not always the case. Whether a journalist is professionally exempt, for example, or a commercial artist, will likely require careful analysis of just what the employee actually does.
Exempt Administrative Job DutiesThe most elusive and imprecise of the definitions of exempt job duties is for exempt "administrative" job duties.
The Regulatory definition provides that exempt administrative job duties are
(a) office or nonmanual work, which is
(b) directly related to management or general business operations of the employer or the employer's customers, and
(c) a primary component of which involves the exercise of independent judgment and discretion about
(d) matters of significance.
The administrative exemption is designed for relatively high-level employees whose main job is to "keep the business running." A useful rule of thumb is to distinguish administrative employees from "operational" or "production" employees. Employees who make what the business sells are not administrative employees. Administrative employees provide "support" to the operational or production employees. They are "staff" rather than "line" employees. Examples of administrative functions include labor relations and personnel (human resources employees), payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax, marketing and advertising (as differentiated from direct sales), quality control, public relations (including shareholder or investment relations, and government relations), legal and regulatory compliance, and some computer-related jobs (such as network, internet and database administration). (See Computer employees.)
To be exempt under the administrative exemption, the "staff" or "support" work must be office or nonmanual, and must be for matters of significance. Clerical employees perform office or nonmanual support work but are not administratively exempt. Nor is administrative work exempt just because it is financially important, in the sense that the employer would experience financial losses if the employee fails to perform competently. Administratively exempt work typically involves the exercise of discretion and judgment, with the authority to make independent decisions on matters which affect the business as a whole or a significant part of it.
Questions to ask might include whether the employee has the authority to formulate or interpret company policies; how major the employee's assignments are in relation to the overall business operations of the enterprise (buying paper clips versus buying a fleet of delivery vehicles, for example); whether the employee has the authority to commit the employer in matters which have significant financial impact; whether the employee has the authority to deviate from company policy without prior approval.
An example of administratively exempt work could be the buyer for a department store. S/he performs office or nonmanual work and is not engaged in production or sales. The job involves work which is necessary to the overall operation of the store -- selecting merchandize to be ordered as inventory. It is important work, since having the right inventory (and the right amount of inventory) is crucial to the overall well-being of the store's business. It involves the exercise of a good deal of important judgment and discretion, since it is up to the buyer to select items which
ConclusionThis is not intended to make you an expert at employment law. This is a simple overview. Specific questions should be addressed to your legal adviser or if you do not have one you may contact us for further advice or consultation. Whatever you decide to do, this is an area ripe for litigation and if you are a Government contractor - suspension and debarment.