Effective December 1, a new rule updates the regulations governing which executive, administrative, professional, and highly compensated employees are entitled to the minimum wage and overtime pay protections of the federal Fair Labor Standards Act (FLSA).
The current federal rules provide an exemption from both the minimum wage and overtime pay requirements of the FLSA for bona fide executive, administrative, and professional employees who meet certain tests regarding their job duties and who are paid on a salary basis at not less than $455 per week ($23,660 per year). “Highly compensated employees” (HCEs) who are paid total annual compensation of $100,000 or more and meet certain other conditions are also deemed exempt.
The new rule updates the salary and compensation levels needed for executive, administrative, professional, and highly compensated employees to be exempt. In particular, the final rule:
- Raises the salary threshold from $455 a week to $913 per week (or $47,476 annually) for a full-year worker;
- Increases the HCE total annual compensation level to $134,004 annually;
- Amends the regulations to allow employers to use nondiscretionary bonuses, incentives, and commissions to satisfy up to 10% of the new standard salary level, so long as employers pay those amounts on a quarterly or more frequent basis; and
- Establishes a mechanism for automatically updating the salary and compensation levels every 3 years, beginning on January 1, 2020.
Note: When both the FLSA and a state law apply, the employee is entitled to the most favorable provisions of each law.
Our Fair Labor Standards Act section features additional information on exemptions from the law’s minimum wage and overtime requirements.
New guidance is available for employers on how to avoid misclassifying employees as independent contractors for purposes of the federal Fair Labor Standards Act (FLSA), which sets basic minimum wage and overtime pay standards. According to the guidance, most workers are employees under the FLSA.
To determine whether a worker is an employee or an independent contractor under the FLSA, courts and the U.S. Department of Labor use the multi-factor “economic realities” test, outlined below, which focuses on whether the worker is economically dependent on the employer or truly in business for him or herself:
- Is the Work an Integral Part of the Employer’s Business? If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business.
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? This factor should not focus on the worker’s ability to work more hours, but rather on whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss.
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment? The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business. The worker’s investment should not be relatively minor compared with that of the employer. If the worker’s investment is relatively minor, that suggests the worker and the employer are not on similar footings and that the worker may be economically dependent on the employer.
- Does the Work Performed Require Special Skill and Initiative? A worker’s business skills, judgment, and initiative—not his or her technical skills—will aid in determining whether the worker is economically independent.
- Is the Relationship Between the Worker and Employer Permanent or Indefinite? Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship. The key is whether the lack of permanence or indefiniteness is due to operational characteristics intrinsic to the industry, or the worker’s own business initiative.
- What is the Nature and Degree of the Employer’s Control? The employer’s control should be analyzed in light of the ultimate determination of whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.
More information on which employers and workers are covered under the FLSA is featured in our section on the Fair Labor Standards Act.
The U.S. Department of Labor is proposing to update the rules governing which executive, administrative, and professional employees (“white collar workers”) are entitled to the minimum wage and overtime pay protections of the federal Fair Labor Standards Act (FLSA).
Unless exempt, employees covered by the FLSA must receive the federal minimum wage of at least $7.25 per hour and overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. (Note: When both the FLSA and a state law apply, an employee is entitled to the most favorable provisions of each law. Be sure to check your state’s wage and hour laws for requirements related to minimum wage, overtime, and exemptions.)
The current federal rules provide an exemption from both the FLSA minimum wage and overtime pay requirements for bona fide executive, administrative, and professional employees who meet certain tests regarding their job duties and who are paid on a salary basis at not less than $455 per week ($23,660 per year). The agency’s proposed rule would raise this salary threshold from $455 a week to a projected level of $970 per week ($50,440 annually) in 2016.
Other highlights of the proposal include changes to the total annual compensation requirement needed to exempt highly compensated employees from the FLSA’s minimum wage and overtime pay protections, and the consideration of two alternative mechanisms for automatically updating the salary and compensation levels going forward.
Our section on Employee Pay includes additional information on FLSA exemptions and these proposed changes.