Impact of New Overtime Rules on Employers
On May 18, 2016, the U.S. Department of Labor (DOL) released its “Final Rule” updating the overtime regulations under the Fair Labor Standards Act (FLSA). According to the Obama Administration, these changes will result in approximately 4.2 million additional workers across the county becoming eligible to receive overtime pay.
This Law Watch will provide a brief explanation of the general impact that the Final Rule has on employers, and then focus specifically on the impact of the Final Rule for public schools.
General Impact of the Final Rule on Employers
The FLSA generally requires that “non-exempt” employees be paid overtime for additional hours worked in excess of 40 hours a week, at 150% of their usual hourly compensation rate. Certain employees, however, have historically been exempt from this overtime pay requirement under the FLSA regulations.
For example, executive, administrative, professional, outside sales, and computer employees who meet certain minimum requirements related to their primary job duties and earn a fixed, predetermined salary over a certain minimum amount have historically been exempt from overtime. These are commonly referred to as the “white collar” or “EAP” (for “Executive, Administrative and Professional”) exemptions. The Final Rule does not impact the so-called “duties test” that must be met currently under the white collar/EAP exemptions, but does raise the minimum salary threshold for such exemptions from $23,660 per year ($455 per week) to $47,476 per year ($913 per week). When determining whether a “white collar” employee meets this new salary threshold, the Final Rule permits employers to satisfy, in some circumstances, up to 10% of the salary threshold ($4,747.70) by including nondiscretionary bonuses, incentive payments, and commissions into an employee’s salary figure.
Another category of employees who have historically been exempt from the overtime requirement are “highly compensated employees,” who must meet a more lenient “duties test” than under the “white collar” exemptions, but have a much higher minimum salary threshold to qualify for exemption. The Final Rule raises the “highly compensated employee” minimum salary exemption threshold from $100,000 to $134,004. In addition, nondiscretionary bonuses, incentive payments, and commissions may be counted toward the salary threshold as long as the employer pays the standard salary threshold ($47,476 per year or $913 per week) on a general salary basis.
This is the first time the salary thresholds have been raised since 2004. The Final Rule further requires the salary thresholds to be updated every three years, beginning January 1, 2020.
As a result of the new minimum salary thresholds, employees earning less than $47,476 per year ($913 per week) must be paid overtime – except teachers, academic administrative personnel, physicians, lawyers, judges and outside sales workers – if they work more than 40 hours per week. Employees earning between $47,476 and $134,004 do not need to be paid overtime if they meet the standard “duties test” for the white collar/EAP exemptions. Finally, employees earning more than $134,004 who meet the more the relaxed “duties test” do not need to be paid overtime.
Specific Impact of the Final Rule on Public Schools
Although the Final Rule updated the salary thresholds for many “white collar” employees, thus making them eligible to receive overtime pay, it does not apply the higher salary thresholds to teachers, school administrators and coaches:
• Teachers: Bona fide teachers remain exempt from the FLSA overtime rules, regardless of the amount of their annual salaries. Teachers are exempt from the overtime rules only if (a) their primary duty is to teach, tutor, instruct or lecture in the activity of imparting knowledge, and (b) they are employed by an educational establishment. The regulations define an “educational establishment” as an “elementary or secondary school system, an institution of higher education or other educational institution.” Therefore, bona fide teachers must be employed directly by an educational establishment in order to qualify for this overtime exemption; substitute teachers who are directly employed by staffing agencies or private contractors may qualify to receive overtime pay depending upon the numbers of hours worked during a particular week.
• Academic administrative personnel: Likewise, employees who fit under the federal definition for “academic administrative personnel” – which includes superintendents, principals, assistant principals, postsecondary department heads, academic counselors and advisors, and other employees with similar duties – would also be unaffected by the new FLSA regulations, assuming they are paid a salary “at least equal to the entrance salary for teachers in the [same] educational establishment.” The Final Rule explained that school employees whose work “relates to general business operations, building management and maintenance or food services program are not considered “academic administrative personnel.” Thus, under the Final Rule, most certificated administrative staff within the public school setting, who receive annual salaries which no less than what a starting teacher receives, would be exempt from overtime pay requirements.
• Athletic coaches: Coaches qualify for the same overtime exemption as teachers, “if their primary duty is teaching as opposed to recruiting students to play sports or performing manual labor.”
• Other school employees: Other school district personnel may be affected by the new guidelines, depending upon their job duties and annual compensation. For example, some non-certificated managers or directors who oversee school program may continue to qualify as “exempt administrative employees,” so long as their annual compensation satisfied the new salary threshold established by the Final Rule. Thus, a public school entity will need to review each employment position that it believes to be exempt from overtime pay requirements to determine if the “duty test” and salary threshold can be satisfied in order to continue that exemption.
Employers have until December 1, 2016, to come into compliance with the Final Rule.
In response to the new regulations, employers have a few different options to address potential overtime for “white collar” employees. For example, employers can:
• Limit employees who are eligible to work overtime by restricting work hours to no more than 40 hours per week;
• Pay overtime compensation to eligible employees who work more than 40 hours per week;
• Raise the salaries of employees who meet the “duties test” above the new salary threshold; or
• Utilize some combination of the above.
We hope you find this issue of KKAL’s Labor and Employment Law Watch helpful and informative. Please understand that the Law Watch is designed to provide information about current developments and required actions. If you have any questions regarding any labor and employment law matter, including the issues discussed in this newsletter, please do not hesitate to contact us at 717-392-1100, or email us at the following addresses:
KEGEL KELIN ALMY & LORD LLP
Labor & Employment Practice Group