NOTE: On November 22, 2016 a U.S. District Court judge in Texas granted an Emergency Motion for Preliminary Injunction and enjoined the U.S. Department of Labor from implementing and enforcing the Overtime Final Rule which was scheduled to take effect on December 1, 2016. In a press release the Department of Labor stated that it strongly disagrees with the decision by the court and is considering all legal options. As a result of the court ruling, the Overtime Final Rule will not take effect on December 1, 2016. Further updates will be provided as soon as information is available.
On May 25, 2016, the United States Department of Labor (DOL) issued a Final Rule to “update” the overtime regulations that are intended to make more employees eligible to receive overtime payment. The Obama administration opined that the salary threshold for overtime payment had become outdated and directed the DOL to update the salary threshold. As a result, the salary threshold indicating eligibility for overtime is being increased from $455 per week, or $23,660 per year, to $913 per week, or $47,476 per year. The DOL estimates that the new rule will extend overtime pay eligibility to over 4.2 million workers. The new rule will become effective on December 1, 2016.
The Fair Labor Standards Act (FLSA) guarantees a minimum wage for all hours worked during the work week plus overtime premium pay of not less than one and one-half times the employee’s regular rate of pay for hours worked over 40 in a work week. The FLSA provides a number of exemptions from overtime pay for executive, administrative, professional and computer employees. These exemptions are frequently referred to as “EAP” or “white collar” exemptions. For an employer to claim a white collar exemption for a particular employee, three tests, generally, must be satisfied: (1) Salary Level Test, (2) Salary Basis Test and (3) Duties Test. The Final Rule primarily revises the Salary Level Test, but employers must keep in mind that all three tests must be satisfied in order to claim a white collar exemption.
Salary Level Test
As stated above, for many years the Salary Level Test required a salary of not less than $455 per week, or $23,660 a year, and the Final Rule will increase the salary level to $913 per week, or $47,476 a year. Employers may use nondiscretionary bonuses and incentive bonuses to satisfy up to 10 percent of the standard salary level amount (e.g., up to $91 of the $913 per week threshold). Such payments must be paid on a quarterly or more frequent basis. If an employee does not earn enough nondiscretionary bonus or incentive payment in a given quarter, an employer may make a “catch-up” payment no later than the next pay period after the end of the quarter. The salary level test does not apply to certain employees, including employees practicing law or medicine.
Salary Basis Test
Being paid on a salary basis means an employee regularly receives a predetermined amount of money each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because variations in the quality or quantity of the employee’s work. Generally, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. As stated above, the Final Rule permits an employer to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level, provided these payments are made on a quarterly or more frequent basis.
Deductions from pay are permissible only:
• When an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability;
• When an exempt employee is absent from work for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan or policy of providing paid sick leave;
• To offset amounts employees receive as jury or witness fees, or for military pay;
• For penalties imposed in good faith for infractions of safety rules of major significance; or
• For unpaid disciplinary suspensions of one or more full days imposed for workplace conduct rule infractions.
Employers must be very careful in making any deduction from an exempt employee’s salary, and an improper deduction may cause loss of the white collar exemption and possibly expose the employer to an employee’s claim for past overtime payments. The salary basis test does not apply to certain employees including employees who practice law or medicine.
To qualify for the white collar exemptions, employees must meet certain tests regarding the duties performed by the employee. An employer must keep in mind that regardless of the job title that an employer may give to an employee, the Duties Test is not met if the actual duties performed by the employee do not meet the requirements of the test.
To qualify for the executive employee exemption, all of the following job duties requirements must be satisfied:
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision;
• The employee must customarily and regularly direct the work of at least two or more other full time employees, or their equivalent (e.g. one full-time and two half-time employees);
• The employee must have the authority to hire or fire other employees, or the employee’s recommendation as to hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.
A. Administrative Exemption
To qualify for the administrative exemption, all of the following duties must be satisfied:
• 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; and
• The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
B. Professional Exemption
To qualify as a “learned professional” all of the following duties requirements must be satisfied:
The employee’s primary duties must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
• The advanced knowledge must be in a field of science or learning, including law, medicine, theology, accounting, actuarial, computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy, and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning; and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction, which means specialized academic training is a standard prerequisite for entry into the profession.
An employee who holds an academic degree for the practice of medicine is also exempt if the employee is engaged in an internship or resident program of the profession.
C. Computer Employee Exemption
To qualify for the exemption, the following duties requirements must be satisfied:
• The employee must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field; and
• The employee’s primary duty must consist of:
1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;
2. The design, development, documentation, analysis, creation, testing, or modification of computer programs, including prototypes, based on and related to user or system design specifications;
3. The design documentation, testing, creation or modification of computer programs related to machine operating systems; or
4. A combination of the aforementioned duties, the performance of which requires the same level of skills.
Highly Compensated Employees (HCE)
Employees who receive total compensation of at least $134,004 are exempt from overtime requirements of the FLSA if they meet a more relaxed Duties Test, if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee The Department of Labor will automatically update the salary level threshold every three years based on wage growth over time.
Non-Profit Corporations and the FLSA
Do the FLSA overtime regulations apply to non-profit corporations? In some states – but not New York – this is a complicated question. Some non-profit employers may not be covered by the FLSA. In general a non-profit corporation may not be covered under the FLSA overtime rule if it does not engage in certain types of business related activities (“enterprise coverage”). However, even if the non-profit corporation itself is not covered under the FLSA overtime rule, individual employees of the non-profit corporation may be protected by the overtime rule if the employee is “engaged in interstate commerce” (“individual coverage”). The term “interstate commerce” is interpreted very expansively and, for example, an employee may be considered to engage in interstate commerce if the employee makes or receives interstate telephone calls, ships materials to another state, or transports persons or property to another state. For example, if an employee regularly makes calls out of state to order goods or services, that employee is protected by the FLSA overtime rule under “individual coverage” even though the employer may not be covered under “enterprise coverage”.
New York State is one among numerous states that have incorporated the FLSA overtime rule into state law or regulation. See, New York Codes Rules and Regulations, Title 12 §142-2.2. Accordingly, even if a non-profit corporation might otherwise not be covered under FLSA pursuant to the enterprise coverage exception, the non-profit corporation would nevertheless be subject to the overtime rule through application of the NYS regulation.
Employers need to review whether they have properly classified employees as “exempt” from overtime payment requirements. Employers must be aware that the salary threshold under the Salary Level Test has been increased, but must also understand that all three tests, the Salary Level Test, Salary Basis Test and Duties Test must be satisfied in order to classify an employee as exempt from overtime pay. The misclassification of an employee could have substantial financial consequences, including owed overtime pay.
Kern Augustine, P.C., Attorneys to Health Professionals, DrLaw.com, is solely devoted to the representation and defense of physicians and other health care professionals. Mr. Moy may be contacted at 1-800-445-0954 or via email at info@DrLaw.com.