In an article yesterday, the President announced that he would be proposing changes to FLSA overtime and minimum wage exemptions. These changes, if approved will have a significant impact on many business who rely on executive or administrative exemptions to the FLSA. These exemptions permit an employer to pay a straight salary to certain employees even when those employees work more than 40 hours per week. Without these exemptions, the employer would be required to pay the employee one and one half times his regular rate of pay for each hour over 40. These proposed changes mean that fewer employees will be eligible for these exemptions.
The Law, the Rules, and the Proposed Changes
Section 213(a)(1) of the Fair Labor Standards Act (“FLSA”) provides that employees “employed in a bona fide executive, administrative, or professional capacity” are not subject to the minimum wage and overtime provisions of the FLSA. The rules defining these employees provide, among other things, that the employee must be “[c]ompensated on a salary basis at
a rate of not less than $455 per week.” 29 CFR Sections 541.100(a)(1) & 541.200(a)(1). Based upon this, employees who meet the other requirements of an executive or administrative employee, who are paid at least $23,660 a year, do not need to be paid a minimum wage nor do they need to be paid one and one half times their regular rate when they work more than 40 hours in a week.
The President plans to have this amount increased to $50,400 per year (almost $970.00 per week) in 2016. While this change will most likely affect executive, administrative, and professional employees, from a practical standpoint, this will largely affect companies using the executive and administrative exemptions.
In addition to the salary requirements, to meet the executive exemption, the employee must:
- Have a primary job duty of “management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;”
- “[C]ustomarily and regularly [direct] the work of two or more other employees;”
- Have “the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.”
29 CFR Section 541.100(a).
Management activities include: “interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.” 29 CFR Section 541.102.
In addition to the salary requirements, to meet the administrative exemption, the employee’s primary job duty must be the “performance of office or non-manual work directly related to the management or general business operations” and must include “the exercise of discretion and independent judgment with respect to matters of significance.” 29 CFR Section 541.200(a). As examples of administrative employees, the CFR lists administrative assistants to business owners and executives, project leads, human resource managers, employees in the financial service industry, and insurance claims adjusters.
The President expects these rules to be in place by the end of the year. This means that employers relying on the administrative and executive exemptions to the FLSA need to closely follow these rule changes and be prepared to reevaluate their exemptions upon their passing. This is a significant, over 100%, increase in the salary threshold to meet these exceptions. As these are rule changes, not legislative changes, the approval of congress is not needed. However, there is a procedure which must be followed for any change to the CFR (outlined here).
If you have questions or concerns regarding these exemptions, the proposed rule changes, or any other employment law mater, please contact the experienced professionals at Smith & Associates for a free consultation.