A years-long tug-of-war over Fair Labor Standards Act (FLSA) rules for paying overtime has landed in the proverbial middle mud hole, with new rules effective Jan. 1 creating legal pitfalls for unwary staffing firms.
The new rule increases the minimum salary required to qualify as exempt from overtime under the FLSA’s white-collar exemptions (executive, administrative, and professional employees). The new salary requirement is $684 per week (equivalent to $35,568 annually), below which employees are entitled to overtime pay for hours worked over 40 in a week. That level had been $455 per week.
The rule also raises the minimum annual salary threshold for so-called “highly compensated employees” to $107,432 from $100,000. Further, it allows employers to apply nondiscretionary bonuses and incentive payments (such as commissions) toward meeting the salary level, if these payments are made at least annually and satisfy no more than 10% of the salary standard.
Beware of deviations. Some states have stricter overtime rules than mandated under federal law. California, for example, has no “highly compensated employee” exemption. It also has no provision allowing bonuses and incentive compensation to count toward the minimum salary threshold. Additionally, the minimum salary to qualify for exempt status is much higher in California than under the FLSA, and California’s “duties test” for exempt status is much stricter than under the FLSA. Staffing firms should consult employment counsel to ensure they are in compliance.
Further, various US territories have different threshold levels. American Samoa’s salary level is $380 per week, while the level in Puerto Rico, the US Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands is $455 per week.
‘Catch-up’ period. Employers have a one-time catch-up period at the end of a 52-week period to make up any shortfall in salary and keep the employee’s exempt status. Each pay period, the employer must pay the employee, on a salary basis, at least 90% of the standard salary level (or at least $615.60 per week). At the end of the 52-week period, if the total of the salary plus nondiscretionary bonuses and incentive payments is less than the standard salary level, the employer has one pay period to make up the shortfall.
Beware: This catch-up payment does not count toward the salary amount for the 52-week period in which it is made — it only counts toward the previous 52-week period.
What Staffing Firms Can Do
Because staffing firms may retain liability for overtime violations even if their clients supervise the employees, be proactive. Don’t count on your clients to bring potential issues to your attention.
Audit the compensation level of all staff currently classified as white-collar exempt. For those whose salaries fall short, make an informed business decision about whether to reclassify the employee as non-exempt (and start paying overtime), or to raise the employee’s salary to meet the new standard. Coordinate with your affected clients, if appropriate, and clearly communicate with any affected staff members about any changes to their classification. For those who are reclassified as non-exempt, make sure they understand that this not a demotion or an adverse employment action.
Provide any reclassified staff members with sufficient training so that they understand the importance of accurately reporting their working hours. Make sure your firm is prepared for a potential increase in time-punch data and record keeping. The US Department of Labor estimates that 1.3 million workers have either become eligible for overtime or need their salary increased to at least $684 per week.
Start planning now to anticipate any necessary catch-up payments at the end of the 52-week period.
Confer with employment counsel to ensure compliance not only with the FLSA, but also with local overtime laws.
Don’t forget about the “duties” tests for the various white-collar exemptions; these are unchanged by the new rules.