With a new federal rule updating overtime pay that becomes effective next year, now is a good time to review all jobs that are currently considered exempt to determine if they are properly classified.

The U.S. Department of Labor announced last month the final rules updating the minimum salary basis test for certain exemptions.

The new rule, which becomes effective Jan. 1, will make overtime pay available to 1.3 million additional workers, according to the Labor Department.

Employees who are otherwise qualified for the exemption under the administrative, executive and professional categories will be entitled to overtime pay unless they also meet the salary basis test of earning at least $684 per week, an increase of almost 50% from the current salary threshold of $455 a week.

The Labor Department also increased the threshold for the highly compensated employee exemption. It permits employers to consider up to 10% of the compensation as bonuses, something not available in the $684 a week threshold.

Specifically, the changes:

  • raise the standard salary level from the current $455 per week to $684 per week ;
  • raise the total annual compensation requirement for highly compensated employees from the currently enforced level of $100,000 per year to $107,432 per year;
  • allow employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices; and
  • revise the special salary levels for workers in U.S. territories and the motion picture industry.

The Labor Department said the revisions are needed to update outdated salary levels that were relevant in 2004, but do not reflect the increasing wages in today’s workplace.

What the Labor Department failed to accomplish is overhauling the entire law. The Fair Labor Standards Act became federal law in 1938, but too many antiquated provisions still remain.

For example, the law assumes people work a traditional 40-hour workweek and fails to account for the flexible and unique nature of nontraditional jobs and work environments, even prohibiting private employers from providing compensatory time off.

In addition, the law still places a cumbersome and often difficult to administer duties test to the exemptions, which make it likely employees who earn $684 a week are still nonexempt.

To be exempt under the white collar regulations, the employee must be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; be paid at least a specified weekly salary level, which is $684 per week (the equivalent of $35,568 annually for a full-year worker) under this final rule; and primarily perform executive, administrative or professional duties, as defined in the department’s regulations or qualify for the highly compensated employee exemption and perform at least one of the primary duties of the test.

Too often, this final requirement is lost on employers, who wrongly assume that merely paying an employee the minimum salary will allow the employer to avoid overtime. It doesn’t work like that.

In addition to the salary basis, the law imposes several categories of employees who can be exempt, each of which sets forth a list of confusing and often misunderstood requirements, such as managing the enterprise for the executive exemption, and exercise of discretion and independent judgment with respect to matters of significance for the administrative exemption.

Many times, employers wrongly classify an employee as exempt, and then fail to pay overtime, in part because the employer isn’t tracking hours of an exempt employee. If the employer does this, it can result in double what is owed in overtime as well as attorney’s fees.

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Karen Michael is an attorney with Richmond-based KarenMichael PLC. She can be reached at kmichael@karenmichaelconsulting.com.

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