This article originally published in The Daily Record July 6, 2016.
It’s difficult to remember a time when a part of almost every presentation and conversation with clients, peers, friends, and even some family members didn’t include talk of the “white-collar” exemptions to the Fair Labor Standards Act (“FLSA”). First we talked about what the proposed changes to the overtime rule might be. Then, once the proposed rule was issued, we dissected every aspect and discussed trends in the almost 300,000 comments submitted to the Department of Labor (“DOL”). Once the comment period closed, many of us became office chair prognosticators in an attempt to prepare anyone within earshot for what was likely to come whenever the final rule was released. Would the minimum salary threshold be more or less than the proposed $50,440? How could the DOL seriously consider changing the duties test to require exempt employees spend at least 50 percent of their time on exempt duties (the “California” rule)? When would the final rule be published? Once published, how long would employers have to prepare before the effective date? Opinions and predictions were as abundant as cottonwood fluff in the spring.
The market for DOL-focused crystal balls disappeared on May 17, 2016, when the White House and the DOL announced details of the final rule the night before its official release. Or did it? We still don’t know what impact the final rule will have on businesses both small and large. So I, for one, will not be offering my deluxe model orb to the first sideshow huckster that offers me $20. (Although an offer of $50 might be a different story entirely.)
Although there are several things I don’t need a crystal ball to see, let’s put this time-tested tool to work.
The first thing I see are countless small employers, and several not-for-profit employers, who are convinced that the FLSA – and consequently the changes in the overtime rule – don’t apply to them. The fact is that the FLSA applies to almost every employer, either through enterprise coverage or individual coverage. Enterprise coverage applies to employers with two or more employees and $500,000 in annual dollar volume of sales or other business revenue. Examples of activities triggering individual coverage include employees engaged in interstate commerce (which includes making phone calls and/or sending mail, invoices, payments, emails, etc. out-of-state; handling goods, or even transaction records for good that have traveled across state lines; and even cleaning an office where interstate transactions occur), the production of goods for commerce, or closely-related processes/occupations directly essential to such production, or domestic service. I think you get the picture.
Next, I see employers who believe that salaried employees don’t have to be paid overtime. The truth is, unless employees paid a salary meet all of the requirements to be exempt from the FLSA overtime rule, they must be paid overtime for all time worked over 40 hours in a workweek.
There are other employers who believe that as long as employees want to be paid a salary and forego overtime, or similarly the employees agree with the pay practice, that makes it ok. In reality, if an employer’s pay practices are not in compliance with the FLSA, regardless of whether the employees are satisfied with the practice, and in some cases have even signed a statement to that effect, the practice is still unlawful and the employer risks significant liability. (This belief led an employer to adopt a policy and practice requested by employees of providing them with “comp time” in lieu of overtime pay. An audit uncovered this, and other FLSA violations, resulting in thousands of dollars in back overtime wages and penalties due to the employees.)
The reason I use the deluxe model crystal ball is because it not only shows me the negative stuff, but also the things employers can do when faced with challenging regulatory issues.
The fact is that, barring some unlikely intervention, the updated overtime rule will go into effect on December 1, 2016. The biggest issue for most employers is the significant increase in the salary threshold for white-collar exemptions to $913 per week ($47,476 annually). For New York employers that’s an increase of $238 per week ($12,376 annually) from the current state minimum salary requirement. If an exempt employee’s salary is less than the federal threshold on the effective date, the employer will have two choices; increase the salary to meet or exceed the threshold, or reclassify the employee as nonexempt, which consequently will make the employee eligible for overtime compensation. But, that choice is not as limiting as it may first appear.
Option 1: If the employee rarely works more than 40 hours each workweek, calculate the hourly wage rate by dividing their weekly salary by 40 hours. For example, a salary of $687 / 40 hours equals $17.18 per hour. The employer then has the option to not allow the employee to work overtime, or for those rare weeks where the employee does work over 40 hours, pay time-and-a-half for the overtime. In this case the overtime rate calculation is $17.18 x 1.5, which equals $25.77.
Option 2: If the employee’s workweek is regularly more than 40 hours, calculate the rates necessary to keep the employee’s weekly wage the same. For example, if the employee regularly works 50 hours per week, their straight and overtime rates should equal approximately $687 for the week. In this case an hourly rate of $12.50, with the resulting overtime rate of $18.75 ($12.50 x 1.5) will ensure the employee makes the same weekly wage. (($12.50 x 40 hours) + (18.75 x 10 hours) = $687.50.)
Option 3: The fluctuating workweek (a.k.a. salaried nonexempt) is the most complex choice from the available options. This approach requires paying the non-exempt employee a salary which represents their straight-time rate for all hours worked in the workweek. That means the employee’s salary amount represents the “one” in the “one-and-one-half” calculation for overtime purposes. So, for the time worked over 40 hours in the workweek, the employee is paid an additional one-half of their regular rate. This rate is calculated by dividing the salary amount by all of the time worked in the workweek. Under a true fluctuating workweek scenario, the employee’s regular hourly rate decreases as the number of hours worked increases. Also, there are two requirements to keep in mind. First, the employee’s regular rate must never fall below the applicable minimum wage, and the employee must receive their full salary each week.
For example, if the employee works 55 hours in the workweek and receives a weekly salary of $695, the calculation would be as follows:
$695 / 55 hours = $12.64 regular hourly rate
$12.64 x 0.5 = $6.32 “half-time” O/T rate
$6.32 x 15 O/T hours = $94.80 O/T amount
$695 + $94.80 = 789.80
If the employee works 45 hours the following week, their pay will be $733.60.
One of the primary reasons employers avoid the fluctuating workweek method is that it can get complicated. In order to make weekly payroll calculations less complicated, and still take advantage of the benefits this method has to offer, employers can modify the formula by fixing the half-time rate at a set amount. Using the example above, divide the employee’s salary by 40 hours ($695 / 40 = $17.38), multiple by 0.5 ($17.38 x 0.5 = $8.69), and use the result as the employee’s half-time rate regardless of the number of overtime hours. Under this scenario, if the employee works 55 hours, they would receive $825.35 (($695 + ($8.69 x 15) = $825.35). If the employee works 45 hours the following week, they will receive $738.45 (($6.95 + ($8.69 x 5) = $738.45).
Final words on the FLSA? I think not.
Please feel free to contact me at firstname.lastname@example.org, or 855-672-4142 with questions or for more information.
Disclaimer: This content is for informational purposes only, does not constitute a legal opinion, and is not legal advice. The facts of each situation should be considered and analyzed individually. Therefore, you should always consult with competent employment counsel regarding any issues discussed here.
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