FLSA Proposed Rules Clarified

The Fair Labor Standards Act (FLSA) protects workers by mandating minimum wage be paid and any time worked over 40 hours in a workweek be paid at 150% of the worker's hourly rate. The Act, enacted in 1938, was designed to ensure that "each employee covered by the Act would receive a fair day's pay for a fair day's work and would be protected from the evil of overwork as well as underpay."

Employers are not required to pay overtime for workers deemed exempt from this regulation. The Act has been updated seven times since 1938. Updates have included salary increases and interpretations of exemptions. The last update was in 2004. Generally to be considered exempt, the employee must meet three criteria: salary basis, salary level and duties tests.

First, the employee needs to be paid on a salary basis. To be paid on a salary basis means the employee receives full pre-determined salary for any week in which the employee performs any work, without regard to the number of hours or days worked, or the quantity or quality of work.

Next, the employee's weekly salary level must be at least $455. Finally, the employee must perform duties that fall under exempt categories of executive, administrative, and professional. These categories and others are described in the Wage and Hour Division's Part 541 regulations.

Last month, the proposal to revise this regulation considers excluding or limiting nondiscretionary bonuses based on a predetermined formula from the salary basis. Frequently, this type of compensation is used in retail and restaurant industries and does not guarantee a fixed salary until criteria is met. One consideration in the proposal would place a 10% cap on such bonuses.

The principal impact of this proposal would be a new minimum salary amount. Rather than a precise dollar figure, the proposed rule establishes the minimum salary level equal to the 40th percentile of weekly earning for full-time salaried workers based on the Bureau of Labor Statistics (BLS) or using the Consumer Price Index - for all urban consumers (CPI-U). The amount that appears in the proposed regulation is $921 based on 2013 BLS data. The revised regulation will likely be effective in the spring or summer of 2016. The Bureau of Labor Statistics, which provides the benchmark stated in the proposal projects $970 for the 2016 level when the regulation will be finalized.

Meeting the minimum salary level or amount is considered the "best single test" to determine whether the position is exempt. However, all three tests (salary level, salary basis and duties tests) must be met for the position to qualify as exempt from the FLSA.

There is a possibility the new regulation may also change the duties test which describes the actual obligations of executive, administrative and professional positions. Currently, California law requires exempt employees be "primarily engaged in exempt duties," defined as performing exempt duties at least 50% of their work time. There is suspicion that a similar standard may be released in the final rule since California's "primarily engaged in exempt duties" definition was referenced.

The DOL estimates 4.6 million exempt workers who make less than the 40th percentile will be affected by this legislation in the first year. Additionally, 36,000 employees who are exempt because they currently meet the highly compensated standard of $100,000, but less than the 90th percentile of salaried workers per the BLS statistics as proposed will be affected. It is time to audit compensation policies and practices.