In September 2019, the U.S. Department of Labor (DOL) expanded the Fair Labor Standards Act’s (FLSA) overtime coverage to more than one million workers. In response, employers everywhere readied themselves for a potentially seismic shift. Calls to legal counsel, workforce audits, and wage adjustments ensued to make sure workers were properly classified. Soon, it may be time to do it all again.
Agency’s Targets
In December, the DOL announced it had plans to revisit the salary threshold for “white-collar” exempt employees under the FLSA. Currently, the salary threshold for the professional exemptions is $684 per week, which equates to $35,578 per year.
The DOL also signaled its intent to revisit the salary threshold for the highly compensated employee exemption, currently set at $107,432. Although the department hasn’t made any adjustments to the current salary thresholds, employers should be ready to respond.
Misclassification Penalties
Anytime the DOL makes changes to the FLSA’s standards, it’s a good idea for employers to pay close attention. The distinction between exempt employees (not entitled to overtime pay) and nonexempt employees (eligible for the extra compensation) is often oversimplified or misunderstood.
All too often, words like “salary” and “hourly” have become the primary descriptors for employees who receive overtime pay and those who do not. And all too often, making the determinations on that basis alone leads to financially disastrous consequences for the employer.
Misclassification penalties under the FLSA are quite steep. Whenever employers wrongfully misclassify an employee as exempt, they may be held liable for all unpaid overtime owed to the individual as far back as three years prior to the claim. In other words, misclassification is never an issue to be taken lightly.
3 Tests for Exempt Status
While often regarded as the most important factor determining an employee’s exempt or nonexempt status, the individual’s salary is still only one piece of the puzzle that employers need to consider. The FLSA’s general premise is that all employees are entitled to overtime pay for all hours worked in excess of 40 in a workweek. To be exempt from the overtime requirement, an employee must generally satisfy three tests:
- Salary level test, which refers to the actual monetary amount paid to the employee;
- Salary basis test, which simply means the worker is paid a set salary as opposed to an hourly rate; and
- Primary-duty test.
The “duties” element presents yet another potential landmine for employers in that an employee’s actual job title is essentially meaningless. The DOL will focus on the actual duties performed by the individual to determine whether they fit the exemption criteria.
For white-collar exemptions, the primary-duty test almost always focuses on whether employees exercise significant discretion and independent judgment in the course of their duties. The less discretion they have to make significant decisions, the less likely it is the duties test will be met. If they fail to meet one of the criteria, they are nonexempt under the FLSA and entitled to overtime.
Bottom Line
Luckily, the process to raise the salary threshold doesn’t happen overnight, but you should use the lull in the action wisely to ready yourself. While it’s always a good idea to routinely audit your workforce, the impending new rule presents an important opportunity to zero in on employees whose salaries skirt the current cutoff and decide how they should be properly classified going forward.
Shelby A. Hicks-Merinar is an attorney with Steptoe & Johnson PLLC in Morgantown, West Virginia. You can reach her at shelby.hicks-merinar@steptoe-johnson.com.