UPDATED REGULATIONS FOR DETERMINING WHETHER WHITE COLLAR SALARIED EMPLOYEES ARE EXEMPT FROM OVERTIME

Published on: November 28, 2016

On May 18, 2016 the United States Department of Labor published its final rule (“Final Rule”) updating the overtime regulations governing the exemption of executive, administrative, and professional employees from the minimum wage and overtime pay protections.  The most significant part of the Final Rule updates the salary and compensation levels required for such employees to be exempt by increasing the standard salary level for the first time since 2004 to ($913 per week or $47,476 annually for a full-year employee).  The effective date of the Final Rule is December 1, 2016.

Overview of Overtime Exemption for White Collar Employees.

The federal Fair Labor Standards Act (“FLSA”) and M.G.L. c. 151, §1A (the Massachusetts statute) mandate that any employee working for longer than forty (40) hours a week must receive over-time pay at a rate of 1 and 1 ½ times their regular rate for their time in excess of forty (40) hours per week.  This would include a typical employee with a responsibility that does not require a specific type of advanced knowledge, and that does not consistently require the independent use of the employee’s judgment or their discretion.

Both the Federal and Massachusetts statutes provide for exemptions to the above overtime mandates.  To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis (i.e. currently not less than $455 per week).  In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.  According to the Department of Labor’s fact sheet on this issue the following tests must be met for each type of white collar employee to be entitled to the exemption:

Executive Exemption

  • The employee must be compensated on a salary basis (currently at a rate not less than $455 per week – as of December 1, 2016 at a rate of not less than $913 per week);
  • The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
  • The employee must customarily and regularly direct the work of at least 2 or more other full-time employees or their equivalent; and
  • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative Exemptions

The employee must be compensated on a salary basis (currently at a rate not less than $455 per week – as of December 1, 2016 at a rate of not less than $913 per week);

  • 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 or the employer’s customers; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional Exemption 

The employee must be compensated on a salary basis (currently at a rate not less than $455 per week – as of December 1, 2016 at a rate of not less than $913 per week);

  • The employee’s primary duty 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; and
  • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Although there are two (2) separate statutory schemes concerning overtime pay, both State and Federal, Massachusetts case law has made clear that the Massachusetts laws are mirrored off of the Federal laws, and are to be interpreted the same.  However, please be advised that the FLSA does not prevent Massachusetts from establishing more protective standards. Thus, regular consultation with counsel and accountant professionals is suggested to any employer to confirm compliance with the law.

Overview of Key Changes as Provided for in the Final Rule.

The Final Rule focuses on updating the salary and compensation levels needed for executive, professional and administrative employees to qualify for the white collar worker exemption.  Specifically, the Final Rule:

  1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for a full-year worker; and
  2. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

What this means for employers is that starting on December 1, 2016 employers will need to re-classify employees, including part-time employees, earning less than $47,476 per year as non-exempt employees and start paying overtime at a rate of 1 and 1 ½ times their regular rate for their time in excess of forty (40) hours per week.  Additionally, the Final Rule provides for the automatic updating of the salary thresholds every 3 years commencing on January 1, 2020 in order to ensure that the salary threshold levels will be maintained at the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region, currently the south. Thus, employers should make sure to review overtime requirements more often and at a minimum of no less than every 3 years to be sure of compliance of the Final Rule.

Additional changes due to the Final Rule that all employers should be aware of are outlined as follows:

  1. Employers may use nondiscretionary bonuses and incentive payments (including commissions) as a credit to satisfy up to 10% of the new standard salary level (i.e. $913 per week or $47,476 annually). However, in order for this credit to apply, the payments must be made on a quarterly or more frequent basis.  The Final Rule provides for a catch-up payment in the event an employee does not earn enough in wages or nondiscretionary bonuses in any given quarter to qualify for exempt status.  In such an event, the Final Rule allows for a catch up payment by the employer at the end of the quarter, and the employer has one pay period to make the catch-up payment.
  2. Most employers are aware of the White Collar exemption, but little may know of the Highly Compensated Employees exemption.  The Final Rule sets the total annual compensation requirement for the highly compensated employees exempting the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004.  This also becomes effective on December 1, 2016.  Highly compensated employees are those employees who perform office or non-manual work and are paid a total compensation of (currently $100,000 and as of December 1, 2016 $134,000) or more.  Such employees are exempt from overtime pay if they customarily and regularly perform at least 1 of the duties of an exempt executive, administrative or professional employee as identified above and as of December 1, 2016 make less than $134,000.

Liability

A violation of the Federal and Massachusetts statutes imposes significant penalties for violations.  A violation of the Federal statute will allow, inter alia, the employee to recover double (2x) the amount of their unpaid overtime, reimbursement for reasonable attorney’s fees and costs, as well as other relief such as reinstatement and/or promotion and A willful and knowing violation can lead to imprisonment.  The Massachusetts statute imposes even higher penalties, allowing the employee to recover triple (3x) the amount of their unpaid overtime, as well as reimbursement for their attorney’s fees and associated legal costs.  See M.G.L. c. 151, §1B.  Additionally, if an employee challenges their classification in court, saying that they are entitled to overtime they were not paid, the duty is upon the employer to establish that the employee is exempt.