I. INTRODUCTION
Some employers believe that they need not keep track of hours or pay overtime to any employee paid by salary. This may be like sitting on a time bomb that could explode in a very costly manner if the U.S. Department of Labor (DOL) audits their records and assesses back pay, including payment of uncompensated overtime (up to two years - up to three years, if intentional), civil penalties (and possible criminal penalties), and liquidated damages. Working behind a desk and wearing a “white collar” are not the criteria used to determine whether an employee is exempt from overtime compensation requirements.
The purpose of this article is to review the newly revised federal rules regarding the payment of overtime to employees who work over 40 hours in a work week. The federal Fair Labor Standards Act (“FLSA”), which was “Depression era legislation” originally passed in 1938, establishes both minimum wage and overtime requirements. Minimum wage increased to $5.85 per hour effective July 24, 2007; $6.55 per hour effective July 24, 2008; and $7.25 per hour effective July 24, 2009. The law allows employers to elect to pay new employees less than 20 years of age not less than $4.25 per hour for the first 90 calendar days (not work days) after initial employment. Employers are prohibited by law from taking any action to displace employees (including partial displacements, e.g., reductions in hours, wages or employee benefits) for the purpose of hiring individuals at this lower hourly rate. Under the FLSA, employers may pay tipped-employees cash wages at the rate of $2.13 per hour and allow tips to satisfy or exceed the remainder of the minimum hourly wage rate. The employer is still required to make up any difference between the minimum hourly wage rate and the combination of $2.13 plus tips to ensure that each employee makes at least the minimum wage.
With regard to FLSA’s overtime regulations, effective January 1, 2020, these regulations are being amended to update the salary level required for exemption. These revisions do not change the job duty requirements (duties) to qualify for the exemption.
FLSA regulations are administered by the DOL’s Wage and Hour Division, Employment Standards Administration and may be found at 29 CFR Part 541.
II. NON-EXEMPT V. EXEMPT EMPLOYEES
The FLSA’s general premise is that all employees are “non-exempt” (i.e., all employees must receive overtime pay of at least one and one-half times the regular rate of pay for all hours worked over 40 hours each week). The FLSA however, provides overtime exemptions for certain, but not all salaried employees. In other words, the mere fact that an employee “works behind desks,” wears a “white collar” and is paid on a “salary” basis is not the actual criteria used to determine whether the employee is exempt from overtime compensation requirements. An employee is considered “exempt” only if he or she meets certain criteria. Although exemptions are not contained in FLSA definitions, the DOL, through delegated powers, has been issuing implementing regulations, which have the effect of law, since 1938.
There are three generalized exemptions for certain salaried employees, namely: executive, administrative and professional. Combined with the additional exemptions for “outside sales” employees, certain “computer” employees and “highly compensated” employees, these are collectively and commonly known as the “White Collar” exemptions.
A. Minimum Weekly Salary Test.
Each of the “white collar,” salaried-based exemptions have particular criteria that must be met for the exemption to apply to any employee under consideration as an exempt employee. The first criteria used, regardless of how an employer may attempt to categorize the type of “white collar” exemption of an employee (with the exception of outside sales persons), is whether or not the employee earns at least $844 per week (annual salary of $43,888). If you have a salaried employee earning less than the minimum weekly salary of $844 week, then that employee will not be eligible for exempt status. The minimum weekly salary threshold will increase to $1,1 28 per week (annual salary of $58,656) on January 1, 2025.
B. Inclusion of Non-Discretionary Bonuses and Incentive Payments
The Final Rule permits employers to satisfy up to 10 percent of the standard salary level with nondiscretionary bonuses, incentive payments and commissions that are paid on an annual or more frequent basis. If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52–week period) to retain his or her exempt status, the DOL permits the employer to make a “catch–up” payment within one pay period of the end of the 52–week period. This payment may be up to 10 percent of the total standard salary level for the preceding 52–week period. Any such catch–up payment will count only toward the prior year's salary amount and not toward the salary amount in the year in which it is paid.
C. Future Updates of Salary Level
The DOL has expressed its intent to update the salary level and highly compensated employee threshold “more regularly” in the future through notice-and-comment rulemaking.
D. Important Terms and Definitions used throughout the Regulations.
DOL’s regulations also define several important “terms of art” that are used throughout the FLSA’s exemptions regulations. The following terms, with definitions, are essential to understand in order to apply the various tests required to determine whether an employee is exempt or nonexempt.
“Primary Duty.”
“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
“Directly Related to Management or General Business Operations.”
To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example from working on a manufacturing production line or selling a product in a retail or service establishment. Work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.
“Management.”
Generally, “management” includes, but is not limited to, activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.
“Department or Subdivision.”
The phrase “a customarily recognized department or subdivision” is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function.
“Customarily and Regularly.”
The phrase “customarily and regularly” means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.
“Two or More.”
The phrase “two or more other employees” means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees. The supervision can be distributed among two, three or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent. For example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each supervisor directs the work of two of those workers.
“Particular Weight.”
Factors to be considered in determining whether an employee’s recommendations as to hiring, firing, advancement, promotion or any other change of status are given “particular weight” include, but are not limited to, whether it is part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Generally, an executive’s recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include occasional suggestions. An employee’s recommendations may still be deemed to have “particular weight” even if a higher level manager’s recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee’s change in status.
“Employer’s Customers.”
An employee may qualify for the administrative exemption if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. Thus, employees acting as advisors or consultants to their employer’s clients or customers — as tax experts or financial consultants, for example — may be exempt.
“Discretion and Independent Judgment.”
In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term must be applied in the light of all the facts involved in the employee’s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Factors to consider include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation. The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.
“Matters of Significance.”
The term “matters of significance” refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee’s duties may cause serious financial loss to the employer.
E. Highly Compensated Employee “Bright Line” Tests.
To qualify for exempt status, the employee’s total compensation (including commissions, nondiscretionary bonuses and other nondiscretionary compensation) must equal or exceed $132,904 per year, as of July 1, 2024. On January 1, 2025,the total compensation requirement will increase to $151,164 per year. In addition, the employee must “customarily and regularly” perform any one of the exempt duties of an executive, administrative or professional employee (See below).
F. Executive Employee Exemption Tests.
An executive employee is one who has a weekly salary of $844 or more, whose primary duty is the management of the enterprise or a customarily recognized department or subdivisions of the enterprise. In addition, the executive must customarily and regularly direct the work of at least the equivalent of two or more full-time employees. Finally, the executive employee must have the authority to hire or fire (or whose recommendations as to hiring, firing or any other change of status) are given particular weight.
G. Administrative Employee Exemption Tests.
An administrative employee is one who has a weekly salary of $844 or more, whose primary duty is to perform office or non-manual work that directly relates to the management or business operations of the employer or the employer’s customers. The administrative employee’s primary duty includes the exercise of independent discretion and judgment with respect to matters of significance.
Examples of “directly related to the management of business operations” that are specific to financial institution employees found in the regulations include: tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations, computer network, internet and database administration, legal and regulatory compliance.
NOTE: As supplied by the U.S. Department of Labor pursuant to its Fact Sheet 17M: Financial Services Industry Employees and the Part 541 Exemptions under the Fair Labor Standard Act, financial services employees may qualify as being exempt from the act.
Employees in the financial services industry generally meet the duties requirements for the administrative exemption and are not entitled to overtime pay if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption. In applying the exemption, it does not matter whether the employee’s activities are aimed at an end user or an intermediary. The status of financial services employees is based on the duties they perform, not on the identity of the customer they serve.
H. Professional Employee Exemption Tests.
A learned professional employee must earn a weekly salary of $844 or more and have the primary duty of performing work that requires scientific or advanced learning (and not apprentice training) in a specialized field of knowledge that is customarily acquired by a prolonged course of specialized intellectual instruction, but which may be attained through a combination or work experience and intellectual instruction. With qualifications, generally doctors, lawyers, accountants, registered or certified medical technologists, nurses, dental hygienists, physicians assistants, chefs, athletic trainers, professionals working as paralegals and funeral directors or embalmers are examples of learned professional employees.
I. Computer Employee Exemption Tests.
The federal “Minimum Wage Increase Act” and the “Employee Commuting Flexibility Act,” part of the “Small Business Job Protection Act of 1996,” amended the FLSA and provided for a computer professional exemption. The FLSA allows certain computer professionals who are paid at least $844 per week to be exempt from overtime pay provisions. The exemption applies to employees whose primary duty consists of: application of computer systems analysis; techniques and procedures to determine hardware; software or system functional specifications; design, development, documentation, analysis, creation, testing or modification of computer systems based on user or system design specifications; design, documentation, testing, creation or modification of computer programs related to machine operating systems; or a combination of the above-listed duties.
J. Outside Sales Employee Exemption Tests.
Unlike the Executive, Administrative, Professional or Computer employee exemptions discussed above, the outside sales person exemption does not have a minimum weekly salary requirement. The primary duty of an outside sales employee must be the making of sales or obtaining orders or contracts for services and the employee must customarily and regularly engage in such primary duty away from the employer’s place of business.
In all cases regarding “white collar” exemptions, a salaried employee must receive a predetermined amount constituting all or part of the employee’s compensation that is not subject to reduction due to variations in the quantity or quality of work performed. In other words, both the hourly and the salary exempt pay minimum of $844 per week and $43,888 per year must be guaranteed. The FLSA does not preclude an employer from making salary deductions for absences of a full day or more for personal reasons, illness or disability. Furthermore, the FLSA does not give an employee the right to receive a guaranteed salary for any week in which the employee performed no work.
III. CONCLUSION
To qualify for a white-collar exemption, a salaried employee must fit within one of the above-discussed classifications. Although the DOL conducts independent employer audits for compliance with the FLSA, an investigation might also be triggered by a terminated employee, a “disgruntled” employee or in conjunction with employer-employee litigation. The new rules afford banks with an opportunity to review classifications of individual employees, for any misclassification of an employee as “exempt” may be costly. A DOL audit that finds a misclassification, may result in the assessment of back pay, including payment of uncompensated overtime (up to two years - up to three years, if intentional), civil penalties, possible criminal penalties and liquidated damages. In addition, since the FLSA requires that the working hours of a non-exempt employee be recorded on at least a weekly basis, the failure to comply with this recordkeeping requirement is considered an independent violation of the law. When records are not available and the actual number of hours of overtime worked cannot be calculated, it is generally the DOL’s position that the number of hours worked be documented by the employee.
An excellent resource for employers is the U.S. Department of Labor’s website. The site is designed to assist in the understanding of and compliance with the Department’s rules. Access to the regulations may be found at this site along with various fact sheets relating to specific exemptions, employees of specific industries (including “Financial Services Industry Employees”) and exemption “tests” are featured on the website. The website may be found at the following link: https://www.dol.gov/asp/fairpayandsafeworkplaces/.