Fair Labor Standards Act

The U.S. Department of Labor, DOL, released new regulations dictating overtime on May 18, 2016. This change was the largest amendment to the Fair Labor Standards Act (FLSA) in more than twenty years. The FLSA covers the entire U.S., but most states also have their own regulations and laws dictating overtime exemptions.

The Fair Labor Standards Act governs many jobs, while some are excluded because of the statute. These other exempt jobs are not governed by the FLSA's overtime rules.

Employees' wage audits should be conducted regularly and salary adjustments made to stay in compliance with the FLSA. This proactiveness is particularly important for low-wage managers.

The adjustment to the FLSA was made to provide overtime pay for workers that put in over 40-hours a week but have traditionally been exempt because of their tasks. These workers are commonly employees performing executive, professional, or administrative tasks.

The DOL claims 35 percent of salaried workers meet the salary requirements for the new rule. Employees earning less than $47,476 annually or $913 a week are eligible for overtime payments outlined in the amended rule.

The DOL also estimates that this minimum salary condition could jump to $51,000 or $981 a week by 2020 based on wage growth projections. This change typically translates to higher salaries for employees or fewer overtime hours required.

Most employers are expected to either:

  • Increase their employees' salaries to satisfy the salary basis requirement so their employees are exempt from overtime;
  • Leave employees' salaries at the current position and pay the allotted overtime pay as long as it is under the amount of a potential raise; or
  • Have more control and strict guidelines dictating employees' hours to avoid any workers accruing overtime. Employers are still required to pay overtime even if the work was not authorized.

FLSA coverage exclusions

Several jobs have overtime rules that are not covered by the Fair Labor Standards Act.

The two general types of complete exclusion include:

  1. Jobs that are specifically excluded in the statute itself
  2. Jobs that are governed by some other federal labor law.

One example of a job that is excluded from FLSA is a railroad worker. Railroad workers are governed by the Railway Labor Act which takes precedence over the FLSA regulations. Another example is truck drivers who are governed by the Motor Carriers Act.

Most of Fair Labor Standards Act exclusions are found in section 213 of the Fair Labor Standards Act.

Exempt or nonexempt

The terms "exempt" and "nonexempt" refer to the status of an employee under the FLSA. The determinants of an employees' status depend on:

  • How much that employee is paid
  • How that employee is paid
  • The type of work that employee does

Most employees are nonexempt under the FLSA. However, some jobs are classified as exempt by definition like an outside sales representative, while inside sales employees are nonexempt.

There are some exceptions, but for the vast majority of employees, to be considered exempt you must meet all of the following three conditions:

  • You must be a salaried employee and not paid hourly
  • You must earn at least $47,476 annually or $913 per week
  • You must perform job duties that are considered exempt

These requirements are more thoroughly outlined in the FLSA. The law covers relevant information like overtime pay, minimum wage, record keeping, hours worked, and youth employment standards.

The updated FLSA regulation has increased the salary threshold from $23,660 annually to $47,476 annually or $455 a week to $913 a week. After three years, the FLSA updates their salary threshold based on the 40th percentile of full-time salaries in the lowest wage region of the country, which is currently the Southeast.

One exception is for business owners that own at least 20% equity in the business that they are employed by. Regardless of their position in the organization, as long as they are actively engaged in the management, they are considered exempt.

Employees that are nonexempt are entitled to overtime pay for their hours while exempt employees are not entitled to overtime pay. In a given week, all nonexempt employees must be paid overtime for any hours worked beyond the 40.

Salary level test

The salary level test is used to determine whether an employee is exempt or nonexempt. Employees are considered nonexempt using the salary test if they are paid below the mandatory $47,476 annual or $913 a week threshold. For instance, someone on salary for $25,000 would not be considered nonexempt while someone who earns $1000,000 a year would be considered exempt from overtime.

The "salary test" increased from $23,660 annually to $47,476 annually on Dec. 1, 2016.

Salary basis test

The salary basis test shows whether an employee is paid through a salary or by other means. Typically, salaried employees are given a guaranteed minimum sum of money that they will receive for any specified work. This salary may not be the entire form of compensation they receive, but it does show the floor of earnings for that individual.

One indication that you may not be a salaried employee is if your pay total is lower in weeks that you work fewer hours. Salaried employees are paid the same amount across each paycheck excluding bonuses or other varying payments.

The salary basis test from the FLSA applies to reductions in monetary amounts.

Generally, salary-based pay is not reduced because of production quality or the amount of hours worked. The base pay should not be reduced if that employee works fewer hours than normal as long as the reduction of hours is within reason by the employer.

Impermissible reductions can have an impact on the exempt status of an employee. The rule states that employees subjected to impermissible salary reductions are nonexempt. There are a lot of options for employers that have impermissible reductions in employees' salaries, so it is rare for an exempt employee to suddenly become nonexempt because of salary problems.

Doctors, teachers, and lawyers are a few of the jobs that are exempt regardless of their salary basis.

Both the "salary test" and "salary basis test" are updated every three years based on the lowest wage region in the country.

The duties test

The third and final test, after the salary test and salary basis test, is the duties test which states that employees who perform specific job duties are considered exempt. The job title and description outlined by the company don't dictate the exempt status, it is evaluated based on the actual job duties you perform.

There are three categories of job duties to determine exempt status. These categories are executive, administrative, and professional.

Executive

Executive job duties are one of the ways to determine your exempt status. Executive duties require supervising multiple employees, managing as your primary role, and input into the hiring, promotion, assignment, and firing decisions of other employees.

Management must be the primary duty along with the supervision of other employees for one to be considered exempt using the executive duties test. This is determined on a case by case.

The Fair Labor Standards Act has a list of management duties that help classify someone as an executive. This includes

  • Interviewing employees
  • Selecting applicants and training new employees
  • Setting pay rates and schedules of other employees
  • Maintaining production records
  • Auditing and appraising employees' productivity
  • Handling grievances, complaints, and discipline
  • Selecting production techniques
  • Planning and development work strategies for employees
  • Selecting equipment and materials for work
  • Budgeting for your department
  • Monitoring work for compliance
  • Providing a safe and secure workplace

Additionally, employees can be considered executive even if they perform other job duties outside the scope of what is listed above. Many employees who meet the executive test are those that are in charge of a department or supervise production such as a shift manager.

To be considered for the executive exemption status, that employee needs to have strong input into the personnel decisions of their department. They don't necessarily need to have the final say, but their input must be given strong consideration.

This usually means that the person will be required to perform frequent reviews and make recommendations based on their employees' performance. The job description might also outline that this employee must find, vet, or train other employees.

Professional

Another exception is those hired to perform a traditional learned profession like doctors, lawyers, teachers, dentists, registered nurses, accountants, and architects. These careers are just a few of the ones considered exempt by the FLSA because their work requires advanced knowledge, requires specialization and training, and involves the use of judgment and discretion.

Many times, professionally exempt employees must have extensive education beyond high school and often college. The education is targeted to that field specifically and is much more advanced than other trades or arts.

In some instances, employees with creative professional job duties may qualify as exempt from overtime. These jobs could include musicians, actors, writers, artists, composers, or journalist. To classify as the creative professional, one's work must require imagination, originality, inventiveness, and talent.

It is typically easy to identify an employee as being professional exempt, but in some unique cases, it may be less obvious.

Administrative

The administrative exemption status is the most difficult of all job duty exemption tests. Administrative job duties are defined as office or non-manual work that is directly related to management or the general business operations of your employer or a customer. The primary role involves making autonomous decisions and using discretion.

In a nutshell, this status is designed for higher-level employees that are tasked with managing a business. Administrative employees are those who provide support to operational or production employees.

An example of an administrative function could be personnel or labor relations such as with human resources, finance and payroll management, maintenance record keeping, tax and accounting, advertising and marketing, quality assurance and control, public relations management, legal and regulatory compliance, and a variety of computer-based positions.

Computer-based exemptions do not include employees that work in the manufacturing or repairing of computer hardware and peripheral equipment.

The computer employee exemption does not include positions where employees work predominantly on or facilitated by computers and computer software programs. They should not be computer systems analysts, programmers, or other skilled computer-based positions with primary duties described above.

Another very common exemption role is the outside sales employee. To qualify for this exemption the following criteria must be satisfied:

  • The employee's main job duty must be to make sales, obtain orders, or maintain contracts with current or former customers
  • The employee must perform their job duty away from the employer's office space
  • In certain instances, drivers who deliver products can also be considered under this exemption if their main duty is to facilitate sales

Rights for exempt employees

Employees that are considered exempt have virtually no rights for overtime rules under the Fair Labor Standards Act. Exempt employees are to be paid the full amount of their base salary, less permissible deductions, for any work period where they performed their required duties.

The FLSA does not prohibit employers from forcing exempt employees to work a specific schedule, track their hour, or make up lost time because of absences. There are several other laws and regulations that afford exempt employees other rights outside of the FLSA for employment policies, hostile work environments, and other legal mandates.

Rights for nonexempt employees

On the other hand, nonexempt employees are afforded protection for overtime pay under the FLSA. They are given time and one-half their typical pay rate for each hour they work over the relevant overtime threshold as outlined in the FLSA for a designated work period.

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