Should You be Paying Your Salaried Employees Overtime?

November 13, 2016 Meira FerzigerAndrea R. Bernstein

To read the article in Hebrew, click here.

Author’s Update: On November 22, 2016, a federal judge in Texas surprisingly issued an injunction blocking the implementation of the overtime exemption rule changes discussed below.  The Department of Labor has appealed the injunction order, and it is not at this point clear when, or whether, the new overtime rules will go into effect. At this time, businesses should continue to comply with the FLSA in its currently existing form. A chart summarizing the FLSA overtime exemption requirements which are presently in effect can be found here.

Many employers assume that as long as an employee is paid on a salaried (rather than hourly) basis, the employee should (or certainly may) be classified as “exempt” from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”) and any state overtime laws, and therefore the employer need not pay such an employee for overtime hours worked.

This assumption is incorrect. The FLSA and state overtime laws presume that all employees are entitled to overtime pay, unless a particular employee is specifically “exempt” from such requirements, and these laws set forth very specific standards for such exempt status.

As demonstrated in this chart, whether an employee may be classified as exempt from the FLSA’s overtime requirements depends on a detailed analysis of the employee’s job duties, and may also depend on the employee’s rate of pay. Importantly, please note that the chart sets forth the federal law tests for exemption, but many states have more stringent tests for exemption, thereby entitling more employees in a particular state to be eligible for overtime pay. See, for example, California exemption requirements at www.dir.ca.gov/dlse/faq_overtimeexemptions.htm.

To date, under the FLSA, even an employee who meets the stringent duties requirements for the Executive, Administrative and/or Professional exemptions, will generally still be eligible for overtime pay if the employee is paid an amount which is less than $455/week ($23,660/year). As a practical matter, very few salaried employees who otherwise meet the requirements for the Executive, Administrative or Professional exemptions earn such a low salary, and so most of these employees will be exempt from overtime pay requirements.

However, as of December 1, 2016, for an employee to qualify as exempt from the FLSA’s overtime requirements pursuant to the Executive, Administrative or Professional exemptions, the employee will need to be paid on a salary basis (meaning that the employee is paid a predetermined sum on a weekly, monthly or particular pay period basis, and the salary is not subject to deductions based on the quality or quantity of the employee’s work) an amount of at least $913/week ($47,476/year).  Practically, that means that employees who earn below that amount will likely be entitled to overtime pay (note that the chart sets forth the new rates effective as of December 1, 2016).

In addition, “Highly Compensated” employees, for whom the Code of Federal Regulations (“the Regulations”) have a less stringent duties requirement than for the Executive, Administrative and Professional exemptions, will as of December 1, 2016 need to earn at least $2577/week ($134,004/year) (up from the current $1923/week ($100,000/year) to qualify as exempt from overtime pay) in order to qualify for the Highly Compensated employee exemption – meaning that employers may now need to pay overtime pay to employees who earn less than $134,004 and do not meet the requirements for any other statutory exemption.

According to the United.States Department of Labor, the effect of these upcoming changes in the pay rate will be to make an estimated 35% of full-time U.S. salaried workers eligible for overtime pay– an additional 4.2 million workers than are currently eligible for such pay. Additionally, the relevant rate of pay is scheduled to be adjusted in January 2020 and every three years thereafter, in order to account for general changes in wage rates, so the number of employees who are eligible for overtime pay will likely continue to rise.

In light of the increase in the number of salaried employees who will be eligible for overtime pay as of December 1, 2016, employers should analyze the rate of pay and duties of all employees who are paid on a salaried basis and should evaluate with the assistance of counsel whether such employees will be eligible for overtime pay as of such date.

If a salaried employee will become eligible for overtime pay on December 1, 2016 on account of the new rules, then the employer should consider whether to:

  1. Raise the employee’s salary above an annual rate of $47,476 ($913/week) in order to maintain the employee’s exempt status;
  1. Strictly limit the employee’s work hours to 40 per week (or in some cases to 8 hours per day) so that the employee will not earn overtime pay; and/or
  1. Pay overtime to the employee in accordance with applicable federal and state wage and hour laws (generally 1.5 times the employee’s regular rate of pay – although sometimes a higher rate).

If the employer choses options 2 or 3 above, then the employer is required by the Regulations to institute a mechanism for the employee to accurately record and report his or her hours worked on a weekly basis.

The consequences of misclassifying an employee, and the accompanying failure to pay required overtime rates are significant. Under federal law, an employee has the right to recover unpaid overtime compensation extending back to a period of three years prior to the date of the employee’s claim, and an employer may be required to pay up to double the sum of the unpaid overtime pay which is actually owed to the employee, in addition to the employee’s legal fees. In order to avoid such an unnecessary waste of an employer’s resources, employers should work closely with legal counsel to ensure that employees are properly classified and are paid for overtime hours worked, if such pay is required by applicable federal or state law.

Meira Ferziger is the head of the labor and employment practice at Schwell Wimpfheimer & Associates and has significant experience in drafting policies, agreements, employee handbooks and guidelines in compliance with U.S. federal and state law. Meira functions as an integral part of the day to day operation of corporate clients by counseling them through their employment-related practices and decisions, and also advises clients as to employment issues that arise from corporate transactions, such as restructurings and acquisitions.

Meira can be reached at 646 328 0794 or mferziger@swalegal.com

Andrea Bernstein is a member of the labor and employment practice at SWA and represents U.S. companies with respect to all facets of U.S. employment law. Andrea has significant experience litigating employment cases on behalf of employers, with emphasis on litigation of restrictive covenants, wage and hour matters, and discrimination, harassment, and retaliation claims. She also has broad experience in counseling HR personnel and in-house counsel on legal compliance and risk avoidance issues in the employment law context.

Andrea can be reached at 646 328 0775 or abernstein@swalegal.com

This SWA publication is intended for informational purposes and should not be regarded as legal advice. For more information about the issues included in this publication, please contact Meira Ferziger or Andrea R. Bernstein. The invitation to contact is not to be construed as a solicitation for legal work. Any new attorney/client relationship will be confirmed in writing.