posted July 7, 2016

Fair Labor Standards Act – Understanding the Upcoming Changes

by Diane Goke, CPA, Consulting Manager

Employee pay is a critical responsibility that employers must take very seriously. In addition to payroll and employer-paid benefits absorbing often upwards of 80% of an entity’s operations budget, it is also the factor that has the greatest impact on an employee’s personal livelihood. As employers, it is crucial that we accurately pay our employees based on wage agreements, state and federal rules.

The Fair Labor Standards Act (FLSA) is the federal wage law that requires covered employers to pay overtime to non-exempt employees that work over 40 hours in a week. The status of exempt is met by various factors and rules set forth by the FLSA, but the most common method for determination is the test for exemption. This test requires employers look at the salary basis, salary level and the job duties test. This test requires that all three requirements must be met. The salary basis test requires we look at how we are paying our employees. The salary level test requires we look at what amount we are paying our employees. And the job duties test requires we look at what duties we are requiring of our employees. When these three tests are analyzed, we can determine if an employee is considered exempt or non-exempt of certain sections of the FLSA.

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The amount of pay we have used for this examination has not been updated since 2004. On May 18, 2016, the Department of Labor (DOL) announced the final rule extending overtime pay under FLSA. The rule will go into effect on December 1, 2016. The final rule increases the minimum wage from $455 to $913 per week ($23,660 and $47,476 annually respectively) as the salary level necessary for employees (in most cases) to be exempt.

However, the FLSA also has exemptions for certain types of workers. One of the most common is the “white collar exemption”. This exemption covers employees that fall into the following categories: executive employees, administrative employees, professional employees, computer employees, outside sales people and highly compensated employees. The salary level for highly compensated employees increases from $100,000 to $134,004. These salary thresholds will be updated every three years beginning January 1, 2020.

What does this mean for your organization? If you currently have employees classified as exempt and their annual pay is less than $47,476, then under these new rules, they will no longer qualify to be exempt and will move to the non-exempt classification which means they will be subject to overtime pay. It is important for employers to review their annual pay amounts for all employees and consider the impact of this new rule that will go in to effect later this winter.

Special rules for Education Institutions

The final rule will not change the existing specific rules for education employees who are exempt from overtime laws regardless of salary paid. Education employees include teachers, principals, assistant principals, superintendents, department heads and academic counselors. Other education employees that are involved in the following: curriculum; quality and methods of instructing, measuring and testing the learning potential and achievement of students; and establishing and maintaining academic and grading standards also fall under this exemption. Specifically excluded from the education exemption are jobs relating to such things as building management, health of students, psychologists and lunch room managers.

Teachers continue to be classified as exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. Exempt teachers include, but are not limited to, regular academic teachers; kindergarten or nursery school teachers; teachers of gifted or disabled children; teachers of skilled and semi-skilled trades and occupations; teachers engaged in automobile driving instruction; aircraft flight instructors; home economics teachers; and vocal or instrument music teachers. The salary and salary basis requirements do not apply to bona fide teachers. Having a primary duty of teaching, tutoring, instructing or lecturing in the activity of imparting knowledge includes, by its very nature, exercising discretion and judgment.

§541.204 provides for an additional consideration for educational institutions. Specifically, non-instructional type staff who may be eligible for exemption under the job duties test referenced above allows the salary basis amount to be reduced to the entry rate of pay listed on the teacher salary schedule. This means as an education employer, you can look at other positions that would otherwise be considered exempt based on the pay basis and job duties test and lower the pay amount to the annualized amount of your starting teacher pay.

So what does all this mean? It is important that all employers review their current position listing and the amount of pay for each position. All positions currently classified as exempt that are paid less than $913 per week ($47,476 annually) should be carefully examined to determine if the wages should be increased, or if the position will be reclassified as non-exempt and subject to overtime effective December 1, 2016.

Another consideration, December 1, 2016 falls on a Thursday and is likely in the middle of your pay period. It is important to ensure your organization is compliant effective December 1, which may require you to implement these changes at the close of the prior pay period.

For more information on these changes and all other requirements of the Fair Labor Standards Act, you may also attend our upcoming workshop in Mesa, Arizona on August 15th. For more information, visit http://bit.ly/FLSAworkshop2016


The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.