The business landscape is constantly evolving, and for employers, staying compliant with labor laws is paramount. A significant change is on the horizon with the new federal overtime rule. This update will drastically impact how businesses classify employees and calculate wages. Let’s delve into the details.
The Fair Labor Standards Act (FLSA): A Brief Overview
The Fair Labor Standards Act (FLSA) is a federal law that establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Enacted in 1938, the FLSA aimed to improve working conditions and ensure fair wages for American workers.
To comply with the FLSA, employers must:
- Pay employees at least the federal minimum wage.
- Pay overtime to non-exempt employees who work more than 40 hours in a workweek.
- Keep accurate records of employees’ hours worked and wages paid.
- Comply with child labor provisions.
Exempt vs. Non-Exempt Employees
A cornerstone of FLSA compliance is understanding the distinction between exempt and non-exempt employees.
- Non-exempt employees are entitled to overtime pay for hours worked in excess of 40 per workweek.
- Exempt employees are excluded from overtime pay requirements. To qualify for exemption, employees must meet specific salary and duties tests.
What Constitutes Hours Worked?
Determining which time counts as “hours worked” can be complex. The FLSA includes:
- Waiting time: If employees are required to be on duty or at the employer’s premises, they are generally working even if not actively engaged in work.
- On-call time: If employees are required to be available to work and cannot use the time effectively for personal purposes, it may be considered work time.
- Meal and rest periods: Short breaks are usually not compensable, but longer meal periods may be compensable if employees are required to be on duty or at the employer’s premises.
- Training time: Training that is primarily for the benefit of the employer is generally considered work time.
- Travel time: Travel time to and from work is typically not compensable. However, travel time during the workday is often compensable.
- Sleep time: Employees required to sleep on the job may have some of that time excluded from hours worked if certain conditions are met.
“White Collar Exemptions”
The FLSA establishes specific exemptions for white-collar workers who meet certain salary and duties requirements. These exemptions include:
- Executive: Manages a department or subdivision, supervises two or more employees, and has authority to hire, fire, or promote.
- Administrative: Performs office or non-manual work related to the management or general business operations of the employer or the employer’s customers.
- Learned professional: Performs work requiring advanced knowledge in a field of science or learning typically acquired through prolonged study.
- Creative professional: Engages in work requiring invention, imagination, originality, or talent in a recognized artistic or creative field.
- Computer professional: Performs work in the application of systems analysis technique and procedures, design, development, documentation, analysis, evaluation, testing, or maintenance of computer systems or programs.
- Outside sales: Makes sales or obtains orders or contracts for services or for the use of facilities for which a regular recurring commission is paid.
- Highly compensated: Earns at least $107,800 per year and performs office or non-manual work that involves the exercise of discretion and independent judgment with respect to matters of significance.
Common Exemption Mistakes
Employers often make mistakes when classifying employees as exempt. Common errors include:
- Always classifying salaried employees as exempt: Salary alone does not determine exempt status.
- Always classifying supervisors as exempt: Supervisors must meet specific duties tests to be exempt.
- Classifying exemptions based on job descriptions or titles only: Job titles and descriptions do not automatically determine exempt status.
- Always classifying commissioned employees as exempt: Commissioned employees must meet specific salary and duties requirements to be exempt.
- Equating all jobs performed by highly educated employees as exempt positions: Education level alone does not determine exempt status.
Enforcement of the FLSA
The U.S. Department of Labor (DOL) is responsible for enforcing the FLSA. Employees who believe they have been wrongly denied overtime pay may file a complaint with the DOL.
- Recovery of back wages: If the DOL finds violations, employers may be required to pay back wages to affected employees.
- Penalties of violating FLSA: Violations can result in significant penalties, including liquidated damages equal to the amount of unpaid wages.
Enter: The New Federal Overtime Rule
To address wage stagnation, the DOL has issued a new overtime rule that increases the minimum salary levels for certain white-collar exemptions. The increases will occur in two phases:
- July 1, 2024: The standard salary level for the executive, administrative, and professional exemptions will increase to $68,445 per year.
- January 1, 2025: The highly compensated exemption level will increase to $148,000 per year.
Additionally, the rule includes provisions for automatic salary level adjustments every three years starting July 1, 2027.
Importantly, the new rule does not change the duties test for exemptions; employers must still ensure employees meet the specific duties requirements.
What Are Your Next Steps to Legally Protect Your Business?
To prepare for the new overtime rule, employers should take the following steps:
- Identify all exempt employees and current salary levels: Review personnel records to determine which employees are classified as exempt and their current salaries.
- Identify each employee below the new minimum salary threshold: Determine which exempt employees will be affected by the salary level increases.
- Identify total cost to raise salaries to the minimum level: Calculate the financial impact of increasing salaries to comply with the new rule.
- Decide whether you will raise their salary or convert them to non-exempt status: Weigh the costs and benefits of each option. If you choose to reclassify employees, consider:
- How to determine their hourly rates
- How to calculate their regular rate
- How to track hours worked
- How their benefits may be impacted
- Construct a careful communication plan: Develop a clear and consistent message for employees regarding any changes to their employment status or compensation.
Staying informed about legal updates is crucial for businesses to avoid costly penalties and maintain compliance. Partnering with the HR experts at MP can provide valuable guidance and support in navigating complex labor laws.
If you’re looking for additional insight on how this change may impact your business, let’s have a conversation!
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