2016 DOL – Final Overtime Rule

The federal government has published its long-awaited changes to the regulations (the “Final Rule”) that set employee overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA).  California’s overtime rules are typically more generous to employees than those under the FLSA, so California employers typically focus on those rules.  However, most employers have to follow FLSA requirements as well if the FLSA’s requirements are more generous to employees.  Under the Final Rule, the federal government’s new minimum salary level for exempt employees is, for now, higher than the minimum salary required under California law.

The Final Rule

The Final Rule makes the following changes to FLSA overtime exemption requirements:

• Increases the minimum salary employees are required to earn in order to qualify for the overtime exemption to $913 per week or $47,476 per year.
• Increases the minimum salary employees are required to earn in order to qualify for the “highly compensated employee” overtime exemption to $134,004 per year.
• Requires the federal government to evaluate and adjust these minimum salaries every three years, beginning in 2020.
• Allows employers to count up to 10% of an employee’s nondiscretionary bonuses and incentive payments (including commissions) towards this salary test. Please note that this practice is currently NOT permitted under California law.

The changes listed above come into effect on December 1, 2016.  The Final Rule did not make any changes to the “duties” tests under the FLSA, as was originally feared.  The decision not to change the FLSA’s duties test does not help California employers because California’s “duties” test remains a more rigorous test than the one under the FLSA.  Therefore, companies must continue to ensure that all of their exempt employees are spending more than 50% of their work time performing exempt duties in order to meet the California standard for overtime exemption.

Do I have to follow the FLSA?

The short answer is, most likely.

The FLSA applies to all employees of any company that has at least $500,000 in volume per year and is engaged in “interstate commerce” (the so-called “enterprise coverage”).  Interstate commerce is, of course, a legal term of art, but courts typically interpret its reach very broadly so that most businesses are subject to the FLSA.  Interstate commerce includes not only the production of goods or services that cross state lines, but also includes the handing of goods or services that cross state lines, the use of communication devices (telephone, e-mail) across state lines, and employee travel across state lines.

In calculating the required $500,000 in volume, nonprofit organizations can generally exclude income derived directly from their charitable activities.  However, nonprofit organizations that have $500,000 or more in business from activities not directly related to their charitable purpose (for example, gift shops) are likely subject to the FLSA if their income from those sources exceeds $500,000.

The FLSA also applies to hospitals, schools, residential homes that provide care to the sick, elderly, or disabled, and organizations providing education to gifted children or the disabled.  These employers are subject to the FLSA regardless of sales volume, nonprofit status, or their level of “interstate commerce” activity.  One narrow exception is that the Obama administration is not requiring Medicaid-funded residential care facilities for the disabled with 15 or fewer beds to follow the Final Rule until March 17, 2019.

Even if your company as a whole is not subject to the FLSA under the enterprise coverage, you may have individual employees subject to the FLSA if those employees engage in the types of “interstate commerce” activities listed above.  There is no minimum sales volume for this test; all that is required is that an employee regularly engages in interstate commerce (for example, regularly making out of state telephone calls.)

Using these standards, there are few truly local companies who would fall outside FLSA coverage.  Employers should consult counsel before assuming they do not have to follow the FLSA.

Interaction with California law

It is important to note that the California overtime exemption salary test is equal to two times the state minimum wage.  Since California is increasing its minimum wage in annual steps, the state salary test for exempt employees will surpass this FLSA test when the state minimum wage increases to $12 per hour.  State minimum wage reaches $12 per hour on January 1, 2019 for employers with more than 25 employees, and January 1, 2020 for employers with 25 employees or less.  Employers subject to the FLSA will always have to follow whichever salary test is higher: the FLSA requirement or the California requirement.

Local minimum wages that are higher than the state minimum wage do not impact the California salary test in determining the exempt status of its employees.

Steps to take

Employers need to closely review the salaries of all exempt, salaried employees to whom they do not pay overtime wages.  For employees whose salaries fall below the above thresholds, there are a few options:

• Convert those employees to nonexempt, hourly employees, eligible for overtime.
• Raise the salaries of those employees to satisfy the salary test in the Final Rule.
• Make sure those employees never work more than 40 hours per week.

Employers also need to re-evaluate and audit the salaries paid to exempt employees annually to ensure they are meeting the requirements of the FLSA and California salary tests then in effect.

Our firm is ready to assist you in reviewing your salary practices to conform to the new Final Rule.

By Brian Ewing, Esq.