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DOL Final Rule on FLSA Exemptions

Table of Contents

• Webinar PowerPoint Presentation • Faculty Bios • Supplementary Materials Provided by the DOL

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DOL Final Rule on FLSA ExemptionsThursday, July 28, 1:00 PM – 2:30 PM EDT

Sponsored by the Section of Labor and Employment Lawwww.americanbar.org/laborlaw

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PANELISTS

• The Solicitor of Labor, The Honorable M. Patricia Smith, US Department of Labor, Washington, DC

• Lawrence Peikes, Wiggin and Dana LLP, Stamford, CT (Management)

• Paul Lukas, Nichols Kaster, Minneapolis, MN (Employee)

• Hope Pordy, Spivak Lipton LLP, New York, NY(Employee/Union)


Hot Off the Press

• “Why Obama’s New Overtime Rules Could Be a Wet Blanket for Small Businesses” ~ Fortune Magazine (6/3/16)

• “Surprise, Surprise, Obama's New Overtime Rule was Never Intended to Raise Your Wages” ~ FoxNews.Com (5/20/16)

• “The New Overtime Rules Will Help Middle-Class Americans” ~ Newsweek (6/6/16)

• “4 Ways the New Overtime Rules May Affect Your Paycheck” ~ CNN Money (5/18/16)

• “Will the New Overtime Rules Really Hurt Workers?” ~ The New Yorker (5/20/16)


Introduction

• New rule released May 18, 2016 • Updates the Fair Labor Standard Act’s overtime

regulations regarding the executive, administrative and professional exemptions (“white collar exemptions”)

• Exemptions created by Section 13(a)(1) of the FLSA

• Exemptions defined and explained in 29 C.F.R. Part 541


The Proposed Rule

• Five key parts:– Standard salary level pegged to 40th percentile of

salaried wages on a national basis– Highly compensated employees level pegged to

90th percentile of salaried wages on a national level

– Annual updating of salary levels– Comments sought on nondiscretionary bonuses– Comments sought on duties test


Public Comments

• Employees largely supportive• Employers’ chief complaints:

– Salary level too high and should reflect regional wage variations

– Updating of salary levels should be scrapped or phased in

– Nondiscretionary bonuses should be included– Duties test should not be changed


The Final Rule

• Minimum salary for EAP exemptions increased from $455 per week ($23,660 per year) to $913 a week ($47,476 per year).– A smaller increase than the proposed rule

• Increases the threshold for exemption as a “highly compensated employee” (“HCE”) from $100,000 to $134,004 per year. – A larger increase than the proposed rule


Inclusion of Nondiscretionary Bonuses

• Up to ten percent of the salary threshold for non-HCE employees can be met by non-discretionary bonuses, incentive pay, or commissions.– Such payments must be paid on a quarterly or

more frequent basis to count towards the salary level test.

– Employers may make a “catch-up” payment no later than the next pay period after the end of the quarter.

– Any such “catch-up” payment counts only toward the prior quarter’s salary.


Increases Every Three Years

• DOL will update the salary threshold every three years. – The first update will be January 1, 2020– Each update will raise the standard threshold to

the 40th percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020

– The HCE threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.

9


Duties test has not changed

• Revision to current duties test not warranted given changes to salary levels


Guidance Explains What the Changes Will Mean

• Currently exempt EAP employees earning less than $47,476 per year will no longer be exempt as of December 1, 2016

• Employers with exempt EAP employees currently in the $23,660 to $47,476 salary range will have to select from a number of options to comply with the new rule– E.g., increase salary, reclassify to overtime-eligible

• Teachers, academic administrative personnel, physicians, attorneys, and outside sales persons are not subject to the EAP salary level test

11


Regulatory Change Likely to Have Greatest Impact on:

• Employees earning less than $48,000 annually currently classified as exempt

• Geographic regions – South and Midwest• Industries – Hospitality, Tourism, Retail, Restaurants,

Health, Higher Education, and Tech• Job categories – store managers, bank branch

managers (or asst. mgrs.), finance departments, and admissions office and other college staff


Employer Concerns: Potential Impacts on Workforce and Hiring

• Exempt Employees:• longer hours;• more duties; and• salary compression.

• Non-Exempt (Reclassified) Employees:• less training, mentoring, and education;• less flexibility and more restrictions; and• less full-time and more part-time

• New Hiring Dampened


Employer Options for Compliance

1. Maintain Exemption and Raise SalaryTo Meet New Salary Threshold

OR

2. Reclassify as Non-Exempt andPay Overtime Premium for Overtime Hours


Pre-Implementation Analysis

• Analyze the “salary gap” to identify exempt positions falling below the new salary threshold

• Analyze the “duties gap” to determine whether employees earning above the new salary threshold meet the duties test

• Compare the cost of increasing salaries vs. reclassifying positions

• Analyze working hours of employees who might be reclassified and assess whether scheduling changes may be required to control overtime expenses

• Determine pay rates and compensation methods for reclassified employees


Conducting a Self Audit

• Audit exempt positions currently earning under $50,000 (including “part-time”), and determine the amount of OT hours by:– Track hours worked by, for example:

– pulling existing data reflecting start/stop times (such as computer log-in and log-outs, points of entry swipe records); and

– shadowing positions while auditing and evaluating.• Audit exempt positions > $50,000 for compliance w/duties test

» Opportunity to correct pre-existing misclassifications• Consider involving legal counsel for privilege purposes


Tips for Maintaining Exempt Classification

• Increase salary to satisfy new threshold

• Consider using non-discretionary bonuses to reach threshold

• Budget for periodic increases in salary threshold

• Consider and address pay compression on others already making over $50,000


Candidates for Maintaining Exempt Status

• Employees earning just under the new salary threshold

• Employees with substantial non-discretionary bonuses/commissions

• Positions where salary compression not an issue

• Positions requiring significant OT hours


Tips for Reclassifying to Non-Exempt

• Reverse-engineer the comp package• Configure hourly rate, bonuses, and anticipated

OT to maintain overall compensation levels• Reduce or reallocate non-exempt employees’ hours• Spread out hours by hiring new employees or

moving P/T to F/T• Transfer certain tasks up to exempt employees• Consider effect of hours reductions on benefits

eligibility• Consider compensability of time spent on training

and mentoring


Pay Rate Options for Non-Exempt

• Hourly Rate plus OT premium

• Salary plus OT• Fluctuating work week program (fixed salary

for all hours worked, plus half-time OT premium)

• Piece Rate plus OT

• Commissions plus OT


Hourly Rate or Salary Plus OT

• Hourly Rate Plus OT: Straight hourly rate for hours worked up to 40, and then pay 1.5 times regular rate of pay for hours worked in excess of 40

– Divide weekly salary by 40 and pay OT for all hours worked over 40 in a workweek

– If OT is regularly worked, set hourly wage so that, after accounting for OT, total compensation basically remains unchanged

– If OT is unpredictable, analyze representative period to best estimate total compensation and set hourly rate

• Salary Plus Overtime:– Salary for hours worked up to 40– Convert salary to hourly rate for calculation purposes and

pay 1.5 times regular rate of pay for hours worked in excessof 40


Fluctuating Workweek

Fixed Pay for Fluctuating Workweek (“FWW”) –– Pay a fixed salary for all hours worked, divide weekly

salary by number of hours actually worked each workweek, and then pay ½ time for OT hours worked each workweek

– Example of FWW method for calculating OT Assume weekly salary of $500, and workweek in

which 50 hours are actually workedHourly rate for that workweek is $10. Overtime paid

at ½ the hourly rate = $5 X 10 overtime hours = $50 overtime premium

Total compensation for the workweek is $550Without FWW, OT compensation would be $150


Fluctuating Workweek (cont’d)

Drawbacks of Fixed Pay for Fluctuating Workweek Method

– Very specific requirements leading to potential unpaid overtime exposure

Work hours must truly fluctuate

Agreement or understanding with employee is needed before the work is performed

Payment of full salary is due for any workweek in which employee works any hours, whether less than or more than 40

Deductions for “time missed” are not allowed

– Confusing to employees


Candidates for Reclassification

• Employees earning well below new threshold

• Ineligible for non-discretionary bonuses

• Salary increase would cause significant pay compression with higher-level exempt employees

• Employees who work few, if any, OT hours

• Employees who work consistent/predictable OT


Tips for Implementing Reclassification

• Develop Employee Communications Plan– Required as a consequence of DOL rule

changes– No effect on standing within company– Pay may vary each week (if hourly and work

OT)– Subject to core work hours– Less scheduling flexibility


Tips for Implementing Reclassification

• Timekeeping / Record-keeping policies• Restrictions on work outside normal work hours• Mobile devices and remote access• Update offer letters and job descriptions to:

– make hours expectations clear; and– confirm whether salary is for all hours

worked.• Disclosure required by state and local wage theft

laws


Supervisory Training

Monitoring and recording all hours workedAfter-hour emails and other communicationsTime and attendance recordsOvertime approval processDisciplinary protocol for addressing unauthorized

overtimeResponding to employee resistance and

complaints: No retaliation

– Post-implementation compliance audit


Training Newly Non-Exempt Employees

• OT protocols including requirement of manager approval• Discipline for unauthorized overtime• Off the clock work• Complete and accurate time recording• Leave time issues• Working at home/after hours• Travel time• Use of mobile devices• Administration of comp time and flex time• Mechanism for registering complaints and reporting non-

compliance• No retaliation policy


FAQ’s

Be prepared for questions from reclassified employees, such as:Why is their status being changed?Isn’t this a demotion?Will overtime be paid retroactively?Will the change impact work responsibilities?Can they be forced to work overtime if they don’t

want to?If applicable, why is their hourly rate being

lowered?


Economic Impact Analysis

• Establish budgetary impact, in current year and later years– Need more staff (full or part-time) to avoid

overtime?– Change operating hours? – Stagger shifts?

• Consider duty to bargain if changes affect terms of collective bargaining agreements


Practical Concerns

• Salary compression within pay grades/bands, etc.– Raising the lowest salary adjustments at higher levels

to maintain balance• Reclassified employees

– Not used to keeping track of time– Resistance to recording hours– Eliminating/reducing off the clock work

• Weekend emails• After hours calls• Recording after hours compensable time


No Changes to Common Myths

• Still not about being paid a salary• Still not about job title• Still not about written job description• Still not about how "everyone else" does it• Still required to pay OT even if not authorized• Still cannot waive OT entitlement• Still no comp time for private employers


ANTICIPATED LITIGATION ISSUES

• General Litigation Impact• Job Duties Tests Unchanged• “Off-the-Clock” Issues• The Fluctuating Workweek Method• The 10% Bonus Provision• Impact of Effective Date of the Changes• Legal Challenges and Deference


General Litigation Impact

• Public Awareness from Overtime In the News

• Reclassification Raises Questions

• Opportunity for Reclassification Cover

• Opportunity for Willful/Liquidated Defense


Job Duties Tests Unchanged

• The Salary Basis Test – Affected: Executive, Administrative,

Professional, Highly Compensated– Unaffected: Retail Sales, Outside Sales

• The Job Duties Quagmire Avoided– Fewer Exempt Means Fewer Opportunities to

Apply Job Duties Tests– “Put Your Money Where Your Mouth Is”


Off-the-Clock Issues

• Time Keeping Challenges– New to Previously “Exempt” Employees– Unchanged Performance Expectation– Smart Phones and Remote Access for

Previously “Exempt” Employees– Reduced Flexibility “Blow-Back”

• Time Keeping Methods– “Accurate” Time Records– DOL Guidance


The Fluctuating Workweek Method

• Requirements for Application of the Fluctuating Workweek Method

• Advantages

• Disadvantages

• Common Errors and Pitfalls


The 10% Bonus Provision

• High Risk, Low Reward

• 10% in Non-Discretionary Bonus or Commission

• Quarterly Catch-Up Period and Penalty

• Anticipated Errors and Pitfalls


Impact of Effective Date

• Effective Date: December 1, 2016• Mid-Quarter Change, Not Year End

– Payroll Challenges– Challenges Changing Compensation Plan

• 10% Quarterly Catch-Up Challenges• Five Months Left

– Decision Making– Payroll “Practice”


Legal Challenges and Deference

• Challenges to the Process:– Example: Perez v. Mortgage Bankers Ass’n,

135 S. Ct. 1199 (2015)

• Challenges Through Deference: – Example: Encino Motors v. Navarro, 136 S.

Ct. 2117 (2016)


Impact on the Workforce

New overtime protections mark a major victory for working people that will improve the lives of millions of families across America.

~Richard Trumka, AFL-CIO President

• Increase in Compensation – Salary Bump or OT• Increase in Hours for Part-Time Workers• Reduced Hours for Salaried Employees• Increase in Hiring• Improve Health & Safety & Work/Life Balance


Workers’ Wish List

• Higher Salary ThresholdApplying previously-used methodologies, salary threshold should have been set between $50,000 - $60,000 range

• Bright Line Rule for Duties TestEx. CA 50% Rule: EAP Employees must spend 50% of their time exclusively on exempt duties = more objectively reflects primary duty

• Exclusion of Non-Discretionary Bonuses

In Unionized Workforce:• Bargaining over Terms & Conditions of Reclassification• Extension of CBA protections to Converted Employees

DOL Final Rule on FLSA Exemptions Faculty Bios

• M. Patricia Smith (Government), Solicitor of Labor. M. Patricia Smith was confirmed by the Senate as the Solicitor of Labor on February 4, 2010, and assumed her duties on March 1, 2010. Prior to becoming the Solicitor of Labor, Ms. Smith was the New York State Commissioner of Labor since March 6, 2007.

Prior to serving as Commissioner of Labor, she served as Chief of the Labor Bureau in the Office of the New York State Attorney General for eight years. In that position, she developed a system of active government labor law enforcement that became a model for other Attorneys General and enforcement agencies.

For 11 years, Solicitor Smith served as Deputy Bureau Chief and Section Chief of the Labor Bureau, conducting and overseeing all aspects of labor law litigation involving New York State, in state and federal trial and appellate courts. In 1996 and 1997 she argued and won two Employment Retirement Income Security Act cases before the United States Supreme Court.

Before joining the Office of the Attorney General, Solicitor Smith worked for various Legal Services Organizations representing unemployment claimants, minimum wage workers, workers in federal job training programs and job seekers.

She graduated, cum laude from Trinity College in Washington, D.C. in 1974 and from New York University School of Law, with honors, in 1977.

.

• Paul Lukas (Employee/Plaintiff), Paul’s aggressive and creative litigation strategies enable him to successfully represent his clients. Paul has been recognized by his peers as one of the "Top 40 Employment Law Lawyers" in Minnesota and is consistently named to the Super Lawyers list. Courageous and persistent, Paul is a committed advocate for employee and consumer' rights.

Having tried nearly fifty cases, Paul is also a trial veteran with proven results. Early in his career, Paul tried a wide variety of criminal cases, including the nationally renowned State v. Porter case. Winning that case at the Minnesota Supreme Court, Paul helped set the standard for prosecutorial misconduct in criminal cases. After honing his trial skills in the criminal arena, Paul focused his practice on employment litigation, obtaining favorable verdicts for employees in overtime, age, race, national origin, sex discrimination, sex harassment, whistleblower, sexual assault, retaliation, and minority shareholder cases. Paul is a member of Nichols Kaster's National Class and Collective Action Litigation Team and the firm's Consumer Class Action Team. Paul is currently litigating numerous wage and hour and consumer class and collective actions. He has represented thousands of employees and consumers in these practice areas, obtaining well over 100 million dollars for those clients.

Paul's energy and charisma have made him a nationally recognized lecturer on topics such as wage and hour law, employment law, and civil litigation strategies.

• Lawrence Peikes (Management), is a partner in the firm's Stamford and New York City offices where he represents management in all aspects of labor and employment law. His practice encompasses federal and state court litigation, arbitration and mediation of employment discrimination claims,

wrongful discharge claims, wage and hour claims, disputes over the enforcement of covenants not to compete, trade secret protection, and other employment related controversies. Larry also represents employers in administrative proceedings before such agencies as the U.S. Equal Employment Opportunity Commission, the Connecticut Commission on Human Rights and Opportunities, the National Labor Relations Board, the U.S. and Connecticut Departments of Labor, and other administrative bodies charged with the enforcement of federal and state labor laws. In addition, Larry regularly counsels employers with respect to all aspects of the employment relationship, including employee terminations and discipline, collective bargaining, employment contracts, workplace discrimination issues, and alternative dispute resolution.

Larry frequently lectures and writes on employment law issues, ranging from sexual harassment and developments under the federal civil rights laws to wage and hour laws to restrictive covenants. Larry is a Senior Editor and member of the Editorial Board for the Fair Labor Standards Act treatise published by BNA, a contributor to BNA's treatise on The Family and Medical Leave Act, and co-editor of the Employment Law volume of the Connecticut Practice Series. In addition, Larry is a founding member of the Wage & Hour Defense Institute of the Litigation Counsel of America, a nationwide network of experienced and carefully screened wage and hour defense attorneys.

Chambers USA has ranked Larry in the Labor & Employment category since 2012 and notes that he continues to be recognized for his handling of employment law matters such as wage and hour claims, trade secret protection and discrimination claims. (For more about the standards of inclusion in Chambers, please see www.chambersandpartners.com /methodology.)

Larry graduated with a B.A. from the University of Maryland and received his J.D. with honors from The George Washington University, National Law Center.

• Hope Pordy (Union), is a Partner with the law firm of Spivak Lipton LLP in New York, New York. Ms. Pordy represents individual employees in all areas of labor and employment law, including federal and state wage and hour violations, disciplinary actions, employment discrimination, and the negotiation of employment agreements and separation/severance agreements. Ms. Pordy’s practice also includes the representation of unions in collective bargaining negotiations, arbitrations, unfair labor practice charges and litigation. Ms. Pordy is a frequent speaker on wage and hour issues such as independent contractor misclassification, unpaid internships and tipped employees. She currently represents thousands of public sector employees in various cases against the City of New York for overtime violations as well as numerous cases on behalf of employees in the restaurant industry.

Ms. Pordy served as the Union Co-Chair of the ABA’s Federal Labor Standards Legislation Committee (2009-2015) which has jurisdiction over the FLSA, ADEA, FMLA and other statutes administered by the Department of Labor. Ms. Pordy is currently the Union Co-Chair of the ABA’s Leadership Development Program. Ms. Pordy is a member of the AFL-CIO’s Lawyers’ Coordinating Committee, has served as a contributing editor to the National Lawyers’ Guild, Employee and Union Member Guide to Labor Law (West Publications). Hope Pordy has been selected as a New York Super Lawyer from 2011 to 2016, and one of the top women lawyers in the New York Metro Area from 2013 to 2016.

Guidance for Private Employers on Changes to the White Collar Exemptions in the Overtime Final Rule

May 18, 2016

WAGE AND HOUR DIVISIONUNITED STATES DEPARTMENT OF LABOR

Introduction

The Department of Labor’s (“Department”) Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act (FLSA) (the “Overtime Rule” or “Final Rule”) updates the salary level required for the executive, administrative, and professional (“white collar”) exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-exempt employees. The Final Rule strengthens overtime protections and provides greater clarity for workers and employers across a wide range of sectors. Employers, however, are not required to pay minimum wages or overtime to executive, administrative, and professional employees who satisfy the salary level and other requirements to meet one of the white collar exemptions. The Department is issuing this guidance on the application of the white collar exemptions at the same time as publication of the Final Rule in order to help private sector employers evaluate current practices and transition to the requirements of the Final Rule.

In the Final Rule, the Department updated the salary level above which certain “white collar” workers may

be exempt from overtime pay requirements to equal the 40th percentile of earnings of full-time salaried workers from the lowest wage Census Region. This change raises the salary level from its previous amount of $455 per week (the equivalent of $23,660 per year) to a new level of $913 per week (the equivalent of $47,476 per year). Salaried white collar employees paid below the updated salary level are generally entitled to overtime pay, while employees paid at or above the salary level may be exempt from overtime pay if they primarily perform certain duties. The Final Rule also raises the compensation level for highly compensated employees subject to a more minimal duties test from its previous amount of $100,000 to $134,004 annually. These changes take effect on December 1, 2016. The Final Rule also establishes a mechanism for automatically updating the salary and compensation levels every three years, with the first update to take place in 2020. The Final Rule does not include any changes to the duties tests, which also affect the determination of who is exempt from overtime.

In view of the changes introduced by the Final Rule to the salary level in particular, the Department is providing this guidance to assist employers in preparing for implementation of the Final Rule. Part I of this guidance provides a brief background on the FLSA’s white collar exemptions and how they apply generally.

Part II details some of the options employers may exercise in determining how best for their organizations to ensure that they comply with the Final Rule. This guidance, however, is not a comprehensive guide to coverage and compliance under the FLSA. For additional, detailed guidance documents, please visit the Wage and Hour Division’s website at dol.gov/whd.

I. Considerations for Applying the White Collar Exemptions

A review of the baseline white collar exemption requirements will help clarify what has changed as a result of the Final Rule. In the Final Rule, among other things, the Department updated the salary level from its previous amount of $455 per week (the equivalent of $23,660 per year) to $913 per week (the equivalent of $47,476 per year). The salary level is one of three tests for determining whether employees employed as executive, administrative, or professional employees are exempt from the FLSA’s minimum wage and overtime requirements. See 29 U.S.C. 213(a)(1); 29 CFR Part 541. These exemptions are sometimes referred to collectively as the “white collar” exemptions. The Final Rule also made changes to the highly compensated employee exemption and how bonuses are treated for purposes of determining an employee’s exempt status. For guidance on these issues or for additional information on the Final Rule visit dol.gov/whd/overtime/final2016/.

Establishing that a white collar employee is exempt from the FLSA’s minimum wage and overtime requirements involves assessing how the employee is paid (salary basis test), how much the employee earns (salary level test), and whether the employee primarily performs the kind of job duties that Congress meant to exclude from the law’s overtime protections (duties test). Job titles never determine exempt status under the FLSA. Additionally, receiving a particular salary, alone, does not indicate that an employee is exempt from overtime and minimum wage protections. Rather, in order for a white collar exemption to apply, an employee’s specific job duties and earnings must meet all of the applicable requirements provided in the regulations. Not all salaried white collar employees qualify for the white collar exemptions; in fact, many salaried white collar employees are entitled to minimum wage and overtime.

A. Three Tests Must Be Met in Order to Claim a White Collar Exemption

The regulations implementing the white collar exemptions generally require individuals to satisfy three criteria to be exempt from overtime requirements:

• First, they must be paid on a salary basis not subject to reduction based on quality or quantity of work (“salary basis test”) rather than, for example, on an hourly basis;

• Second, their salary must meet a minimum salary level, which after the effective date of the Final Rule will be $913 per week, which is equivalent to $47,476 annually for a full-year worker (“salary level test”); and

• Third, the employee’s primary job duty must involve the kind of work associated with exempt executive, administrative, or professional employees (the “standard duties test”).

The salary level is not a minimum wage requirement, and no employer is required to pay an employee the salary specified in the regulations, unless the employer is claiming an applicable white collar exemption. Administrative and professional employees may also be paid on a “fee basis.” See 29 CFR 541.605. For additional information about payment on a fee basis, see

2. Guidance for Private Employers on Changes to the White Collar Exemptions in the Overtime Final Rule

Job titles never determine

exempt status under the

FLSA. Additionally, receiving

a particular salary, alone,

does not indicate that an

employee is exempt from

overtime and minimum

wage protections.

dol.gov/whd

dol.gov/whd/overtime/final2016/

dol.gov/whd/overtime/final2016/

WHD Fact Sheet 17G.

Note that the discussion in this guidance focuses on the standard exemption. For additional information on the highly compensated employee exemption, which pairs a more relaxed duties test with a higher total earnings level ($134,004 per year, beginning on December 1, 2016), see WHD Fact Sheet 17H.

B. Primary Job Duties for Exempt Executive, Administrative, and Professional Employees

The duties tests remain unchanged under the Final Rule. These tests are summarized below.

Professional Exemption. There are several different kinds of exempt “professional” employees. These include “learned professionals,” “creative professionals,” teachers, and employees practicing law or medicine. Under the Final Rule, exempt professional employees must receive at least $913 a week (the equivalent of $47,476 a year) on a salary or fee basis (compared to $455 a week under the old rule), and must primarily perform work that either requires advanced knowledge in a field of science or learning, usually obtained through a degree, or that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

Many businesses may employ certain professionals who will be unaffected by the new salary level. Specifically, the salary level and salary basis requirements do not apply to teachers, lawyers, or doctors (“bona fide practitioners of law or medicine”). See WHD Fact Sheet 17D.

Example: A business hires an attorney with a law degree to work in its General Counsel’s office. The

attorney performs legal work for the business. The attorney is a bona fide professional, exempt from the FLSA’s provisions, regardless of whether she is paid on a salary basis or meets the salary level.

Administrative Exemption. To qualify for the administrative exemption, an employee must receive at least $913 a week (the equivalent of $47,476 a year) on a salary or fee basis, and the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. Additionally, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. See 29 CFR 541.203 for examples, and WHD Fact Sheet 17C for additional information.

Executive Exemption. To qualify for the executive exemption, an employee must receive compensation on a salary basis of not less than $913 per week (the equivalent of $47,476 a year), and have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. Additionally, the employee must customarily and regularly direct the work of at least two other full-time employees or their equivalent (for example, one full-time and two half-time employees are equivalent to two full-time employees), and have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight. See WHD Fact Sheet 17B.

Example: A maintenance department, which is responsible for maintaining the buildings and grounds of a large technology company, employs a groundskeeping crew lead. The crew lead coordinates the work of three groundskeepers and

United States Department of Labor 3.

Overtime-eligible employees may be paid a salary and

do not need to be paid on an hourly basis. That is,

salaried workers may be eligible for overtime.

https://www.dol.gov/whd/overtime/fs17g_salary.pdf

https://www.dol.gov/whd/overtime/fs17h_highly_comp.htm

https://www.dol.gov/whd/overtime/fs17d_professional.htm

https://www.dol.gov/whd/overtime/fs17c_administrative.pdf

https://www.dol.gov/whd/overtime/fs17b_executive.pdf

makes recommendations for their terminations and promotions. The crew lead earns $38,000 a year ($731 per week) on a salary basis. The crew lead does not meet the new salary level, and therefore is eligible for overtime compensation when the crew lead works more than 40 hours a week. The facility does not need to determine whether the crew lead meets the duties test, because the crew lead does not pass the salary test.

For more information on all of the white collar exemptions, see WHD Fact Sheet 17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees under the Fair Labor Standards Act (FLSA).

II. Options for Compliance for Employers Who Might be Impacted by the Final Rule

Employers have a wide range of options for responding to the changes to the salary level, and the Department does not dictate or recommend any method. Organizations may ensure compliance for those employees affected by the Final Rule in a number

Basic Requirements for Claiming a White Collar Exemption under the Standard Duties Test

EXECUTIVE ADMINISTRATIVE PROFESSIONAL

Salary Basis Test • Employee must be paid on a salary basis

• Employee must be paid on a salary or fee basis


Standard Salary Level Test • $913 per week ($47,476 per year for a full-year

worker)

• $913 per week ($47,476 per year for a full-year worker)

• Special salary level for certain academic administrative personnel


• Salary level test does not apply to doctors, lawyers, or teachers

Standard Duties Test • The employee’s “primary duty” must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise (and managing 2 full- time employees as well).

• Additional requirements provided in 29 CFR 541 Subpart B

• The employee’s “primary duty” must include the exercise of discretion and independent judgment with respect to matters of significance.

• Additional requirements provided in 29 CFR 541 Subpart C

• The employee’s “primary duty” must be to primarily perform work that either requires advanced knowledge in a field of science or learning or that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

• Additional requirements provided in 29 CFR 541 Subpart D


The salary level is

not a minimum wage

requirement, and no

employer is required to

pay an employee the salary

specified in the regulations,

unless the employer is

claiming an applicable white

collar exemption.

https://www.dol.gov/whd/overtime/fs17a_overview.htm




of ways, including providing pay raises that increase workers’ salaries to the new threshold, spreading employment by reducing or eliminating work hours of individual employees working over 40 hours per week for which no overtime is being paid, or paying overtime. This rule does not require employers to convert a salaried worker making less than the new


salary threshold to hourly status: employers can pay non-exempt employees on a salary basis and pay overtime for hours worked beyond 40 in a week. As long as they are complete and accurate, employers may use any method they choose for tracking and recording hours. The method for compliance, which is entirely within each employer’s discretion, will likely depend on the circumstances of that organization’s workforce, including how much employees currently earn and how often employees work overtime, and may include a combination of responses, such as paying overtime and adjusting employees’ hours and schedules. Some potential responses are discussed below.

A. Numerous Options for Compliance

i. After evaluation, no changes to pay or hours necessary

Many organizations may have white collar employees who satisfy one of the duties tests for exemption and earn between the old salary level ($455 per week) and the new salary level ($913 per week). Employers should evaluate all such categories of white collar employees to determine which employees do not work more than 40 hours per workweek. The Final Rule will have no

effect on these employees’ pay because they do not work any overtime even though they will become overtime-protected. They can continue to be paid a salary as before.

Example: An office manager performs the duties of a bona fide administrator and is paid a fixed salary of $42,000 a year. The manager regularly works

from 9am-5pm, Monday through Friday. Because of the change in the salary level, the manager is no longer an exempt employee. Nevertheless, the Final Rule has no impact on the manager’s pay, because the manager does not work more than 40 hours in a given week. The office can continue to pay the manager a fixed salary of $42,000 a year.

ii. Raise salaries

Employers may choose to raise the salaries of employees who meet the duties tests, whose salaries are close to the new salary level, and who regularly work overtime, to at or above the salary level to maintain their exempt status.

Example: An operations manager at an international corporation is paid a salary of $45,000 a year. Her job duties qualify her for the administrative exemption. The manager’s job requires regularly working overtime to direct business operations in multiple time zones. The employer may choose to raise the manager’s salary to at or above $47,476 a year to maintain the manager’s administrative exemption.

What are some options for responding to changes to the salary level?

Raise salaries to maintain exemption

Pay current salaries,

with overtime after 40 hours

Reorganize workloads, adjust

schedules or spread work hours

Adjust wages


Employers can also

pay non-exempt employees

on a salary basis and

pay overtime for hours

worked beyond 40 in a week.

As long as they are complete

and accurate, employers

may use any method they

choose for tracking and

recording hours.

Most affected employees do not work overtime (OT)

60%don’t work OT

20%regularly work OT

19%occasionally

work OT

*Totals don’t sum to 100 due to rounding. For more information, please see Section VI of the Final Rule.

iii. Pay overtime above a salary

Employers also can continue to pay employees a salary and pay overtime for hours in excess of 40 per week. Although the FLSA requires employers to keep records of how many hours overtime-eligible employees work, the law does not require that overtime-eligible workers be paid on an hourly basis. Rather, employers may continue to pay employees a salary covering a fixed number of hours, which could include hours above 40. There are several ways to pay a salary and pay overtime.

An employer might pay employees a salary for the first 40 hours of work per week, and then pay overtime for any hours over 40. Employers may choose to do this, for example, for employees who work 40 hours per week and do not frequently work overtime, or who do not consistently work the same amount of overtime.

Example: Alexa, a manager at an advertising agency, earns a fixed salary of $41,600 per year ($800 per week) for a 40 hour workweek. Because her salary is for 40 hours per week, Alexa’s regular rate is $20 per hour. If Alexa works 45 hours one particular week, the employer would pay time and one-half (overtime premium) for five hours at a rate of $30 per hour. Thus, for that week, Alexa should be paid $950, consisting of her $800 per week salary and $150 overtime compensation.

Employers also have the option of paying a straight time salary for more than 40 hours in a week for employees who regularly work more than 40 hours, and paying overtime in addition to the salary. Using this method, the employer will only be required to pay an additional half time overtime premium for overtime hours already included within the salary, and time and a half for hours beyond those included in the salary.

Example: Jamie, an HR manager at a catering company, earns a fixed salary of $44,200 per year ($850 per week) for a 50 hour workweek. The salary does not include the overtime premium. Because the salary is for 50 hours per week, Jamie’s regular rate is $17 ($850/50). In a normal 50 hour week, the employer would pay Jamie the additional half time overtime premium for the 10 hours of overtime ($8.50/hour). If Jamie worked more than 50 hours in a week, the employer would also owe overtime compensation at time


and a half the regular rate ($17 x 1.5) for hours beyond 50 (because the salary does not cover any payment for those hours).

It is also possible for an employer and employee to agree to a fixed salary for a workweek of more than 40 hours, in which the salary includes overtime compensation under certain conditions. If, however, the employee’s schedule changes in any way during any week (either by working more or fewer hours), the employer must adjust the salary for that week. Employees must be paid based on the hours actually worked during the workweek. This method of paying for overtime, therefore, might be most helpful for employees who consistently work the same amount of overtime every week.

Example: Andre, a manager on a construction project, has an agreement with his company where he is paid a fixed salary of $39,520 per year ($760 per week) for a 45 hour workweek. The fixed salary includes both straight time for the first 40 hours ($16 regular rate x 40 hours) and overtime compensation for hours 41-45 ($24 overtime rate x 5 hours). If Andre’s schedule changes in any way for any week, his salary needs to be adjusted to reflect the hours actually worked for that week.

Many organizations

may already have systems in

place for tracking

non-exempt employees’

hours. These existing

systems can be used for

newly overtime-protected

employees impacted by the

Overtime Rule.

Finally, where employees have hours of work which fluctuate from week to week, employers can pay a fixed salary that covers a fluctuating number of hours at straight time if certain conditions are met, including a clear mutual understanding between the employer and employee. See 29 CFR 778.114 for additional information and criteria for this payment method.

Any overtime-eligible employee may continue to be paid a salary, provided that overtime compensation is also paid and appropriately documented in the employer’s record. Many organizations may already have systems in place for tracking non-exempt employees’ hours. These existing systems can be used for newly overtime-protected employees impacted by the Overtime Rule. As long as they are complete and accurate, employers may use any method they choose for recording hours. Employers may use their own system to keep track of employees’ work hours or require employees to enter their own time into payroll programs. See WHD Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA).

There is no requirement that employees “punch in” and “punch out.” An employer does not need to require an employee to sign in each time she starts and stops work. The employer must, however, keep an accurate record of the number of daily hours worked by the employee. To do so, an employer could allow an employee to just provide the total number of hours worked each day, including the number of overtime hours, by the end of each pay period. For employees who work a fixed schedule, an employer need not track the employee’s exact hours worked each day; rather, the employer and employee can agree to a default schedule that reflects daily and weekly hours, and indicate that the employee followed the agreed-upon schedule, if that is true. Only when the employee deviates from the schedule is the employer required to record the number of hours worked each day. Many employees, both exempt and non-exempt, track their daily and weekly hours by simply recording their hours worked for the employer.

iv. Reorganize Workloads, Adjust Schedules or Spread Work Hours

Employers may wish to reorganize workload distributions or adjust employee schedules in order to comply with the Final Rule. For example, work assignments that are predictable could be assigned at the beginning of the workweek (rather than, for instance, late in the day on Friday for an employee who typically works Monday—Friday) in order to manage overtime hours. Or, when employees regularly perform duties outside of a 9 to 5 workday, organizations may

https://www.dol.gov/whd/regs/compliance/whdfs21.pdf




consider adjusting those employees’ schedules to encompass when most of the work takes place, so that they will not work more than 40 hours each workweek. (The FLSA does not specify days or schedules, such as a Monday—Friday workweek or a 9 to 5 workday; this is provided only as an example of a schedule that many workers follow.)

Example: John, a manager for a local hardware store who satisfies the duties test for the executive exemption, currently begins work at 9am Monday—Friday. Under the Final Rule’s new salary level, he would be newly entitled to overtime compensation. Among other duties, John works until the store closes at 7pm. The store may wish to adjust John’s schedule such that he doesn’t need to begin work until 10am, thus limiting the number of overtime hours he works.

To reduce or eliminate overtime hours, employers may decide to hire new employees or redistribute work hours in excess of 40 across current staff, such as by increasing the work hours of staff who work less than 40 hours per week.

v. Adjust Wages

Employers can adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime so that the total amount paid to the employee remains largely the same. Employers may not, however, reduce an employee’s hourly wage below the highest applicable minimum wage (federal, state, or local), or continually adjust wages each workweek in order to manipulate the regular rate. The employees’ hours worked must still be recorded, and overtime must be paid according to the actual number of hours worked each week.

Example: Assume a supervisor at a private gym who satisfies the duties test for the executive exemption earns $37,000 per year ($711.54 per week). The supervisor regularly works 45 hours per week. The employer may choose to instead pay the employee an hourly rate of $15 and pay time and one-half for the 5 overtime hours worked each week.

$600.00 (40 hours x $15 / hour)

+ $112.50 (5 OT hours x $15 x 1.5)

$712.50 per week

Alternatively, the employer may choose to pay that employee a salary for 40 hours of $600 per week and pay the overtime for hours in excess of 40 per week.

$600.00 (salary for 40 hours/week, equivalent to $15/hour)

+ $112.50 (5 OT hours x $15 x 1.5)

$712.50 per week

Conclusion

The overtime rule updated the regulations to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-eligible workers, making the exemption easier for employers and workers to understand and apply. This guidance is provided to help employers understand their responsibilities and options for complying with the FLSA’s overtime provisions following publication of the Final Rule.

For additional information, please visit www.dol.gov/whd.

www.dol.gov/whd

Guidance for Higher Education Institutions on Paying Overtime under the Fair Labor Standards Act

May 18, 2016


Introduction

Higher education is an important and diverse sector in our economy and civil society. It includes a wide variety of public and private institutions: community colleges, four-year colleges, and large research institutions—ranging from small schools to campuses that are virtual cities of tens of thousands of people. The Department of Labor (Department) recognizes the important contribution that higher education makes to this country and society.

The Department of Labor’s Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act (FLSA) (the “Overtime Rule” or “Final Rule”) will strengthen overtime protections and provide greater clarity for both workers and employers alike across sectors, including higher education. The Final Rule updates the salary level required for the executive, administrative, and professional (“white collar”) exemptions to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-protected employees. The Department updated the salary level threshold above which certain “white collar” workers may be exempt from overtime to equal the 40th percentile of earnings of full-time salaried workers from the lowest wage Census Region.

Once effective, the rule will raise the salary level from its previous amount of $455 per week (the equivalent of $23,660 a year) to $913 per week (the equivalent of $47,476 per year) in 2016. The rule will also raise the compensation level for highly compensated employees subject to a more minimal duties test from its previous amount of $100,000 to $134,004 annually. The Final Rule establishes a mechanism for automatically updating the salary level (and compensation level for highly compensated employees) every three years, with the first update to take place in 2020. Salaried white collar employees paid below the updated salary level are generally entitled to overtime pay; such employees paid at or above the salary level may be exempt from overtime pay if they primarily perform certain duties. These changes take effect on December 1, 2016. The Final Rule does not include any changes to the duties tests, which also affect the determination of who is exempt from overtime.

As with most employees, the minimum wage and overtime provisions of the FLSA generally apply to employees at higher education institutions. Regardless of whether they are operated for profit or not for profit, institutions of higher education are subject to the provisions of the FLSA. However, higher education employers, like other employers, are not required to pay minimum wages and overtime compensation to executive,

administrative, and professional employees who satisfy the salary level and other requirements for one of the white collar exemptions. In addition, certain provisions of the FLSA regulations apply to many white collar employees at higher education institutions that may make them exempt from overtime compensation, even though they earn below the new salary level. These include special provisions for employees whose primary duty is teaching and special salary level rules for academic administrative personnel. Finally, public universities or colleges that qualify as a “public agency” under the FLSA may compensate overtime-eligible employees through the use of compensatory time off (or “comp time”) in lieu of cash overtime premiums.

The Department is issuing this guidance on the application of the white collar exemptions in the higher education context at the same time as publication of the Final Rule in order to help institutions of higher education evaluate current practices and transition to the requirements of the Final Rule. Specifically, in view of the existing regulatory provisions specific to higher education and the changes introduced by the Final Rule to the salary level in particular, the Department is providing this guidance to assist these institutions in preparing for implementation of the Final Rule. Part I of this guidance provides a brief background on the FLSA’s white collar exemptions and how they apply generally. Part II of the guidance addresses categories of job occupations in the higher education sector which may fall under the white collar exemptions, and discusses other employees in higher education who might be affected by the Final Rule. Part III details some of the options employers may exercise in determining how best for their institution to ensure that they comply with the Final Rule. This guidance, however, is not a comprehensive guide to coverage and compliance under the FLSA. For additional, detailed guidance documents, please visit the Wage and Hour Division’s website at dol.gov/whd.

I. Background on the White Collar Exemptions under the FLSA

The FLSA generally requires that employees be paid at least the federal minimum wage for all hours worked and overtime pay at a rate of at least one and one-half times their regular rate of pay for any hours they work beyond 40 hours in a workweek. As a general matter, coverage under the FLSA is broadly construed to ensure that the law provides employees with wage and hour protections, as Congress intended. The FLSA exempts from minimum wage and overtime requirements employees who are bona fide executive, administrative, or professional employees. See 29 U.S.C. 213(a)(1); 29 CFR Part 541. These exemptions

Higher education

employers, like other

employers, are not required

to pay minimum wages and

overtime compensation to

executive, administrative,

and professional employees

who satisfy the salary level

and other requirements

for one of the white collar

exemptions.

2. Guidance for Higher Education Institutions on Paying Overtime under the Fair Labor Standards Act

are sometimes referred to collectively as the white collar exemptions.

As discussed below, establishing that a white collar employee is exempt from the FLSA’s overtime requirements involves assessing how the employee is paid, how much the employee earns, and whether the employee primarily performs the kind of job duties that Congress meant to exclude from the law’s overtime protections. Job titles never determine exempt status under the FLSA. Additionally, receiving a particular salary, alone, does not indicate that an employee is exempt from overtime and minimum wage protections. Rather, in order for a white collar exemption to apply, an employee’s specific job duties and earnings must meet all of the applicable requirements provided in the regulations. To be clear, not all salaried white collar employees qualify for the white collar exemptions; in fact, many salaried white collar employees are entitled to minimum wage and overtime.

A. Three Tests Must Be Met in Order to Claim a White Collar Exemption

The regulations implementing the white collar exemptions generally require individuals to satisfy three criteria to be exempt from overtime requirements:

• First, they must be paid on a salary basis not subject to reduction based on quality or quantity of work (“salary basis test”) rather than, for example, on an hourly basis;

• Second, their salary must meet a minimum salary level, which after the effective date of the Final Rule will be $913 per week, which is equivalent to $47,476 annually for a full-year worker (“salary level test”); and

• Third, the employee’s primary job duty must involve the kind of work associated with exempt executive, administrative, or professional employees (the “standard duties test”).

The salary level is not a minimum wage requirement, and no employer is required to pay an employee the salary specified in the regulations, unless the employer is claiming an applicable white collar exemption. Administrative and professional employees may also be paid on a “fee basis.” See 29 CFR 541.605. For additional information about payment on a fee basis, see WHD Fact Sheet 17G.

Note that the discussion in this guidance focuses on the standard exemption. For additional information on the highly compensated employee exemption, which pairs a more relaxed duties test with a higher total earnings level ($134,004 per year, beginning on December 1, 2016), see WHD Fact Sheet 17H.

B. Primary Job Duties for Exempt Executive, Administrative, and Professional Employees

Under the standard duties test, an employee’s “primary duty” must be that of an exempt executive, administrative, or professional employee. Primary duty means the principal, main, major, or most important duty that the employee performs. See 29 CFR 541.700. Each exemption uses a different test for determining primary duty under the white collar exemptions.

To qualify for the executive exemption, an employee must have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. Additionally, the employee must customarily and regularly direct the work of at least two other full-time employees or their equivalent (for example, one full-time and two half-time employees are equivalent to two full-time employees), and have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Job titles never determine exempt status under the FLSA.

Additionally, receiving a particular salary, alone, does

not indicate that an employee is exempt from overtime

and minimum wage protections.


To qualify for the administrative exemption, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance directly related to management or general business operations.

Regarding the professional exemption, there are several different kinds of exempt “professional” employees. These include “learned professionals,” “creative professionals,” teachers, and employees practicing law or medicine. Learned professionals must primarily perform work that requires advanced knowledge in a field of science or learning.

For additional details about the white collar exemptions generally, see WHD Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer

& Outside Sales Employees under the Fair Labor Standards Act (FLSA).

Determining the primary duty of an employee requires assessment of multiple factors. As discussed in the Department’s longstanding regulations, the amount of time spent performing exempt work can be a useful guide in determining whether exempt work is the primary duty of an employee, and employees who spend more than 50 percent of their time performing exempt work will generally satisfy the primary duty requirement. Of course, all relevant factors must also be considered, with a major emphasis on the character of the employee’s job as a whole, rather than strictly the amount of time spent performing particular duties. The Final Rule made no changes to the standard duties test.

The salary level is not a minimum wage requirement,

and no employer is required to pay an employee the

salary specified in the regulations, unless the employer

is claiming an applicable white collar exemption.



Salary Basis Test • Employee must be paid on a salary basis



Standard Salary Level Test • $913 per week ($47,476 per year for a full-year

worker)





Standard Duties Test • The employee’s “primary duty” must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise (and managing 2 full- time employees as well).

• Additional requirements provided in 29 CFR 541 Subpart B



• The employee’s “primary duty” must be to primarily perform work that either requires advanced knowledge in a field of science or learning or that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.



II. Specific Considerations for Higher Education Institutions in Implementing the Final Rule

Because of special regulations that apply to certain personnel at higher education institutions, many white collar employees at higher education institutions are not subject to the salary level test or are subject to a different salary level test and therefore will not be affected by the new salary level. This Part addresses each of the white collar provisions as they apply in the higher education sector, helping to identify which employees may be impacted by the Final Rule and what potential adjustments employers may make.

Existing (and unchanged) regulatory provisions specific to higher education mean that the Final Rule may have limited impact on teachers and academic administrators. The salary level and salary basis requirements for the white collar exemption do not apply to bona fide teachers. See 29 CFR 541.303(d), .600(e). Additionally, academic administrative personnel that help run higher education institutions and interact with students outside the classroom, such as department heads, academic counselors and advisors, intervention specialists, and others with similar responsibilities, are subject to a special alternative salary level that does not apply to white collar employees outside of higher education. These academic administrative personnel are exempt from the FLSA’s minimum wage and overtime requirements if they are paid at least the entrance salary for teachers at their institution. See 29 CFR 541.600(c).

To the extent that higher education institutions employ workers whose duties are not unique to the education setting, like managers in food service or at the bookstore, those employees will be covered by the new salary level, just like their counterparts at other kinds of institutions and businesses.

A. Professional Exemption

i. In General

There are several different kinds of exempt “professional” employees. These include “learned professionals,” “creative professionals,” teachers, and employees practicing law or medicine. In higher education, employees eligible for the professional exemption often are either learned professionals (such as researchers), or teachers. The new salary level applies to “learned professionals” and “creative professionals,” but it does not apply to teachers (or to

Because of special

regulations that apply

to certain personnel

at higher education

institutions, many white

collar employees at higher

education institutions are

not subject to the salary

level test or are subject

to a different salary level

test and therefore will

not be affected by

the new salary level.


employees practicing law or medicine). To qualify for the professional employee exemption as a “learned professional,” an employee must:

1. Receive compensation on a salary basis of not less than $913 per week (the equivalent of $47,476 a year); and

2. Primarily perform work requiring advanced knowledge in a field of science or learning, such as various physical, chemical, and biological sciences, theology, and architecture. The advanced knowledge is usually obtained while earning a degree. See 29 CFR 541.301.

In higher education, examples of non-teacher learned professionals that generally may meet the duties requirements for professional exemption include certified public accountants, certified athletic trainers, librarians, and psychologists, depending on the employee’s specific job duties and education. A job title alone is not sufficient for determining whether an employee satisfies the duties test.

Unless the individual is a teacher or practicing law or medicine, a professional employee must satisfy the salary basis and salary level tests as well as the duties test to be an exempt professional.

ii. Postdoctoral Fellows

Postdoctoral fellows are employees who conduct research at a higher education institution after the completion of their doctoral studies. Postdoctoral fellows are not considered students because they are not working towards a degree. See Section D below for a discussion of student research assistants. Postdoctoral fellows often meet the duties test for the “learned professional” exemption but must also satisfy the salary basis and salary level tests to qualify for this exemption.

Under the 2016 National Institutes of Health (NIH) salary guidelines for postdoctoral research fellows, some fellows earn more than the revised salary level. Other postdoctoral research fellows earn less, although it is the Department’s understanding that many postdoctoral research fellow salaries are close to the new salary level, and that any differences are not more than a few thousand dollars a year. It is also our understanding that

NIH regularly reviews these salary levels, taking into consideration all relevant factors. Once the Final Rule is effective, higher education institutions may supplement any gap between the current salaries and the new salary level in order to maintain the exemption for these employees or will need to ensure that postdoctoral research fellows who conduct research and earn below the new salary level either do not work overtime or are paid overtime compensation for any hours worked over 40 per week. For overtime-eligible postdoctoral fellows, higher education institutions may comply with the FLSA’s recordkeeping requirements using any timekeeping method they choose, so long as it is complete and accurate. For example, a higher education institution may ask postdoctoral fellows to record their own times.

Some postdoctoral fellows in the humanities also teach. To the extent that a postdoctoral fellow’s primary duty is teaching, higher education institutions can classify such an employee as exempt from overtime under the teacher exemption discussed below. If a postdoctoral fellow does not primarily teach and earns less than the new salary level, the fellow will be entitled to overtime when the fellow works more than 40 hours in a workweek.

iii. Special Provisions for Teachers

Employees in higher education institutions who are teachers will not be affected by the Final Rule. The salary level and salary basis requirements do not apply to bona fide teachers. See 29 CFR 541.303(d), .600(e). Accordingly, the increase in the standard salary level in this Final Rule will not affect the overtime exemptions of bona fide teachers.

Teachers are 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. See 29 CFR 541.204(b), .303. Educational establishments include institutions of higher education.

Exempt teachers in higher education may include college and university professors or adjunct instructors. Faculty members who are engaged as

Employees in higher education institutions who are teachers

will not be affected by the Final Rule.


teachers but also spend a considerable amount of their time in extracurricular activities are still engaged in the primary duty of teaching. Extracurricular activities might include coaching athletic teams or acting as moderators or advisors for drama, speech, debate, or journalism. Such activities are a recognized part of the school’s responsibility in contributing to the educational development of the student. In all situations, examining the particular duties of the employee is how the applicability of an exemption must be determined (rather than location, job title, or other criteria).

a. Coaches

Athletic coaches employed by higher education institutions may qualify for the teacher exemption. Teaching may include instructing student-athletes in how to perform their sport. On the other hand, if coaches’ primary duties are recruiting students to play sports or visiting high schools and athletic camps to conduct student interviews, they are not considered teachers.

The amount of time an employee spends instructing student-athletes in a team sport is a relevant—but not exclusive—factor in determining the employee’s exempt status. For example, assistant athletic instructors who spend more than half of their time instructing student-athletes about physical health, teamwork, and safety likely qualify as exempt teachers. In contrast, assistant coaches, for example, who spend less than a quarter of their time instructing students and most of their time in unrelated activities are unlikely to have a primary duty of teaching.

b. Adjunct Instructors

Adjunct instructors may also be exempt as teachers if they are employed and engaged as teachers in an educational establishment, where their primary duty is teaching, tutoring, instructing or lecturing. Like full-time faculty members, adjunct or part-time instructors are not subject to the salary level or salary basis tests provided they have a primary duty of teaching.

B. Administrative Exemption

i. In General

The new salary level applies to administrative employees, including in higher education. To qualify for the administrative employee exemption (not the special provisions for academic administrative employees, discussed below), an employee must:

1. Receive compensation on a salary basis of not less than $913 per week (the equivalent of $47,476 a year);

2. Have a primary duty that is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers;

3. Additionally, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Such administrative employees in the higher education context might include, for example, admissions counselors or student financial aid officers, depending on the employees’ specific job duties (as job title alone is insufficient to ensure that an employee satisfies the duties test).

ii. Special Provisions for Academic Administrative Employees

There are special regulatory provisions for some administrative employees—known as “academic” administrative employees—whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment. To be exempt, academic administrative employees must either be paid on a salary or fee basis of not less than the salary level, or be paid on a salary basis at least equal to the entrance salary for teachers in the same educational establishment. See 29 CFR 541.204. To the extent that this entrance salary is below the salary level established in the Final Rule, academic administrative employees will be exempt if their salary equals or exceeds the establishment’s entrance salary for teachers.


Exempt academic administrative employees must have the primary duty of performing administrative functions directly related to academic instruction or training. In higher education institutions, academic administrative personnel generally eligible for this exemption include department heads, academic counselors and advisors, intervention specialists who must be available to respond to student academic issues, and other employees with similar responsibilities. For example, academic counselors who perform work such as administering school testing programs, assisting students with academic problems, and advising students concerning degree requirements would satisfy the duties test for this exemption.

Example: An academic advisor at a community college assists students with class selection and educational goals. The advisor earns $42,000 a year ($807.70 a week) on a salary basis, which is also the college’s entrance salary for teachers. Among other things, the advisor assists with placement testing and the course registration process, and helps students to develop course selections consistent with their career choices and degree requirements. In this example, assuming the advisor meets the duties test for academic administrative professionals, the employer would not be required to pay overtime for more than 40 hours worked even though the academic advisor is paid a salary less than $913 per week, because the advisor’s salary is at least equal to the entrance salary for teachers at that institution.

Employees who work in higher education but whose work does not relate to the educational field are not performing academic administrative work. For example, if an employee’s work relates to general business operations, building management and maintenance, human resources, or the health of students and staff, the employee may meet the requirements for a different white collar exemption, but does not perform academic administrative functions.

C. Executive Exemption

The new salary level applies to executive employees, including in higher education. To qualify for the executive employee exemption, an employee must:

1. Receive compensation on a salary basis of not less than $913 per week (the equivalent of $47,476 a year);

2. Have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

3. Customarily and regularly direct the work of at least two or more other full-time employees or their equivalent (for example, one full-time and two half-time employees are equivalent to two full-time employees); and

4. Have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

See 29 CFR 541.100.

Example: A university maintenance department, which is responsible for maintaining the academic buildings and grounds of the university, employs a groundskeeping crew lead. The crew lead coordinates the work of three groundskeepers and makes recommendations for their terminations and promotions. The crew lead earns $38,000 a year ($731 per week) on a salary basis. The crew lead does not meet the new salary level, and therefore is eligible for overtime compensation when she works more than 40 hours a week. The university does not need to determine whether the crew lead meets the duties test, because she does not pass the salary test.

D. Students

As a general matter, most students who work for their college or university are hourly workers who do not work more than 40 hours per week. The Final Rule will not affect these students. Students receiving a salary as graduate teaching assistants or research assistants, and many residential assistants will also not be affected by the Final Rule, even if they work more than 40 hours per week and are paid less than the new salary level.

i. Graduate Teaching Assistants

Graduate teaching assistants who have teaching as their primary duty are not subject to the salary tests and, therefore, remain exempt under the Final Rule.

ii. Research Assistants

Generally, the Department views graduate and undergraduate students who are engaged in research under a faculty member’s supervision in the course of obtaining a degree as being in an educational relationship with the school. As such, the Department would not assert an employment relationship with either the school or any grantor funding the research. Thus, in these situations, the Department will not assert


that such workers are entitled to overtime. This is true even though the student may receive a stipend for performing the research. WHD Opinion Letter 1994 WL 1004845 (June 28, 1994).

Example: A graduate student is enrolled at a university in the process of obtaining a Ph.D. in the biomedical sciences. In addition to coursework toward the university’s degree requirement, the student will engage in original, professional-level research. The student receives a stipend from the university of $25,000. The Department will not assert that the student is entitled to overtime because the Department does not consider the student an employee of the school. This is the case even if the student receives health insurance from the university and if the stipend is subject to federal income taxes.

iii. Residential Assistants

Student residential assistants enrolled in bona fide educational programs who receive reduced room or board charges or tuition credits from the university are not generally considered employees under the FLSA, and therefore are not subject to the FLSA’s wage and hour requirements. See e.g. Field Operations Handbook (FOH) 10b24.

iv. Students in an Employment Relationship

An employment relationship will generally exist with regard to students whose duties are not part of an overall education program and who receive some compensation. For example, students who work at food service counters, sell programs or usher at athletic events, or who wait on tables or wash dishes in dining halls in anticipation of some compensation (money, meals, etc.) are generally considered employees under the Act. See FOH 10b24(b). Most of these students will not be affected by the Final Rule, however, because they are paid hourly and are not performing executive, administrative, or professional duties. As was already the case, these students are entitled to minimum wage and overtime compensation whether or not they earn above the new salary level.

E. Hourly Employees, Blue Collar Employees, and White Collar Employees Who Do Not Meet the Duties Test

Many employees of higher education institutions, including hourly workers, blue collar workers, and white collar workers who fail the duties tests, will not be affected by the Final Rule, because these workers are

already overtime-protected. Such workers are entitled to overtime regardless of how much they make if they work more than 40 hours. Nothing in the Final Rule changes that.

III. Options for Compliance with the Final Rule

The Overtime Rule may impact select groups of workers at higher education institutions, including post-doctoral fellows, administrators, and other salaried workers who meet the duties test for one of the white collar exemptions, but not the new salary level. Colleges and universities may ensure compliance for those employees affected by the rule in a number of ways, including providing pay raises that increase workers’ salaries to the new threshold, spreading employment by reducing or eliminating work hours of individual employees working over 40 hours per week for which no overtime is currently being paid, adjusting wages and hours, or paying overtime. The Department does not dictate or recommend any method.

This rule does not require employers to convert a salaried employee making less than the new salary threshold to hourly status: employers can pay non-exempt employees on a salary basis and pay overtime for hours worked beyond 40 per week. Higher education institutions should already have systems in place for tracking non-exempt employees’ hours. These existing systems can be used for newly overtime-protected employees impacted by the Overtime Rule. As long as they are complete and accurate employers may use any method they choose for recording hours. There is no requirement that employees “punch in” and “punch out.” The method for compliance, which is entirely within each employer’s discretion, will likely depend on the circumstances of that institution’s workforce, including how much employees currently earn and how often employees work overtime, and may include a combination of responses. Some potential responses for educational institutions are discussed below.



Many institutions of higher education have white collar employees who satisfy one of the duties tests for exemption and earn between the old salary level ($455 per week) and the new salary level ($913 per


week). Employers should evaluate all such white collar employees to determine which employees do not work more than 40 hours per workweek. The Final Rule will not affect these employees’ pay because even if they become nonexempt they will not work any overtime. They can continue to be paid on a salary basis as before.

ii. Raise salaries

Employers may choose to raise the salaries of workers who meet one of the duties tests, and who regularly work overtime, to or above the new salary level to maintain their exempt status. For academic administrative employees, educational institutions merely have to ensure that such workers do not earn less than the entrance salary for teachers under that college’s employ to remain exempt.

Example: An annual giving officer for a university is paid a salary of $45,000 a year. The annual giving officer’s job duties qualify the counselor for the administrative (but not academic administrative)

exemption. The counselor regularly works overtime as a result of outreach activities. The employer may choose to raise the annual giving officer’s salary to $47,476 a year to maintain the counselor’s administrative exemption.


Employers also can continue to pay employees a salary and pay overtime for hours in excess of 40 per week. Although the FLSA requires employers to keep records of how many hours overtime-eligible employees work, the law does not require that overtime-eligible workers

be paid on an hourly basis. Rather, any employer, including institutions of higher education, may continue to pay employees a salary covering a fixed number of hours, which could include hours above 40. There are several ways to pay a salary and pay overtime.


Example: Alexa, a budget director at a college, earns a fixed salary of $41,600 per year ($800 per week) for a 40 hour workweek. Because her salary is for 40 hours per week, Alexa’s regular rate is $20 per hour. If Alexa works 45 hours one particular week, the employer would pay time and one-half (overtime premium) for five hours at a rate of $30/hour. Thus, for that week, Alexa should be paid $950, consisting of her $800 per week salary and $150 overtime compensation.


Example: Jamie, an HR manager at a university, earns a fixed salary of $44,200 per year ($850 per week) for a 50 hour workweek. The salary does not include the overtime premium. Because







Adjust wages


the salary is for 50 hours per week, Jaime’s regular rate is $17 ($850/50). In a normal 50 hour week, the employer would pay Jamie the additional half time overtime premium for the 10 hours of overtime ($8.50 per hour). If Jamie worked more than 50 hours in a week, the employer would also owe overtime compensation at time and a half the regular rate ($17 x 1.5) for hours beyond 50 (because the salary does not cover any payment for those hours).

It is also possible for an employer and employee to agree to a fixed salary for a workweek of more than 40 hours, in which the salary includes overtime compensation under certain conditions. If, however, the employee’s schedule changes in any way during any week (either by working more or fewer hours), the employer must adjust the salary for that week. Employees must be paid based on the hours actually worked during each workweek. This method of paying for overtime, therefore, might be most helpful for employees who consistently work the same amount of overtime every week.

Example: Andre, a college admissions counselor, has an agreement with his college where he is paid a fixed salary of $39,520 year ($760 per week) for a 45 hour workweek. The fixed salary includes both straight time for the first 40 hours ($16 regular rate x 40 hours) and overtime compensation for hours 41-45 ($24 overtime rate x 5 hours). If Andre’s schedule changes in any way for any week, his salary needs to be adjusted for that week to reflect the hours actually worked.

Finally, where employees have hours of work which fluctuate from week to week, employers can pay a fixed salary that covers a fluctuating number of hours at straight time if certain conditions are met, including a clear mutual understanding between the employer and employee. See 29 CFR 778.114 for additional information and criteria for this payment method.

Higher education institutions may already have systems in place for tracking non-exempt employees’ hours. These existing systems can be used for newly overtime-protected employees impacted by the Overtime Rule. As long as they

are complete and accurate, employers may use any method they choose for recording hours. Employers may use their own system to keep track of employees’ work hours or require employees to enter their own time into payroll programs. See WHD Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA).

There is no requirement that employees “punch in” and “punch out.” An employer does not need to require an employee to sign in each time she starts and stops work. The employer must, however, keep an accurate record of the number of daily hours worked by the employee. To do so, an employer could allow an employee to just provide the total number of hours worked each day, including the number of overtime hours, by the end of each pay period. For employees who work a fixed schedule, a higher education institution need not track the employee’s exact hours worked each day; rather, the employer and employee can agree to a default schedule that reflects daily and weekly hours, and indicate that the employee followed the agreed-upon schedule, if that is true. See 29 CFR 516.2(c); WHD Fact Sheet #21. Only when the employee deviates from the schedule is the employer required to record the number of hours worked each day on an exceptions basis. Many employees, both exempt and non-exempt, track their daily and weekly hours by simply recording their hours worked for the employer.

iv. Reorganize Workloads, Adjust Schedules, or Spread Work Hours

Employers may wish to reorganize workload distributions or adjust employee schedules in order to comply with the Final Rule. For example, work assignments that are predictable could be assigned at the beginning of the workweek (rather than, for instance, late in the day on Friday for an employee who typically works Monday through Friday) in order to manage overtime hours. Or, when employees regularly perform duties outside of a 9 to 5 workday, colleges and universities may consider adjusting those employees’ schedules to encompass when most of the work takes place, so that they will not work more than

Employers can continue to pay employees a salary

and pay overtime for hours in excess of 40 per week.


40 hours each workweek. (The FLSA does not specify days or schedules, such as a Monday—Friday workweek or a 9 to 5 workday; this is provided only as an example of a schedule that many workers follow.)

Example: Pat, an employee in the admissions office of a university, currently begins work at 8am Monday—Friday. Under the Final Rule’s new salary level, she would be newly entitled to overtime compensation. Pat greets and pre-interviews potential applicants to the university. Since most applicants are in high school, the majority of applicants schedule their appointments between the hours of 2pm and 6pm, and Pat routinely works until 6:30pm. The university may wish to adjust Pat’s schedule such that she doesn’t need to begin work until 10am, thus limiting the number of overtime hours she works.

Employers can hire new employees or increase the work hours of staff who work less than 40 hours per week to reduce or eliminate overtime hours.

v. Adjust Wages

Employers can adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime so that the total amount paid to the employee remains largely the same. Employers may prefer this option for their employees who work a consistent and relatively small number of overtime hours. Employers may not, however, reduce an employee’s hourly wage below the highest applicable minimum wage (federal, state, or local), or continually adjust wages each workweek in order to manipulate the regular rate. The employees’ hours worked must still be recorded, and overtime must be paid according to the actual number of hours worked each week.

Example: Assume an admissions counselor earns $37,000 per year ($711.54 per week). The admissions counselor regularly works 45 hours per week. The employer may choose to instead pay the employee an hourly rate of $15 and pay time and one-half for the 5 overtime hours worked each week.

$600.00 (40 hours x $15 / hour)

+ $112.50 (5 OT hours x $15 x 1.5)

$712.50 per week

Alternatively, the employer may choose to pay that employee a salary for 40 hours of $600 and pay the overtime for hours in excess of 40 per week.


+ $112.50 (5 OT hours x $15 x 1.5)

$712.50 per week

B. Compensatory Time at Public Universities

Public universities or colleges that qualify as a “public agency” under the FLSA may compensate overtime-eligible employees through the use of compensatory time off (or “comp time”) in lieu of cash overtime premiums. A college or university is a public agency under the FLSA if it is a political subdivision of a State. In applying the term “political subdivision,” the Department considers whether (1) the State directly created the entity, or (2) the individuals administering the entity are responsible to public officials or the general electorate. For example, a State university system created by state legislation and administered by a board appointed and removable by the governor is likely a political subdivision of the State, and, therefore, a public agency under the FLSA. See WHD Opinion Letter, 2009 WL 649021 (Jan. 16, 2009); see also WHD Opinion Letter, 1995 WL 1032498 (July 17, 1995) (advising that a public community college could provide comp time in lieu of overtime premiums). Private higher education institutions must, however, pay their overtime-eligible employees a cash premium for all overtime hours at a rate not less than one and one-half

There is no requirement

that employees “punch in”

and “punch out.”


times the regular rate at which the employee is actually employed. Note that overtime-eligible employees generally may not accrue more than 240 hours of comp time, but employees engaged to work in a public safety activity, an emergency response activity, or a seasonal activity may accrue as much as 480 hours of comp time. See 29 U.S.C 207(o)(3)(A).

If an overtime-eligible public employee receives comp time instead of overtime pay, the comp time must be credited at the same rate as cash overtime: no less than 1.5 hours of comp time for each hour of overtime worked. See 29 CFR 553.22. Additionally, any comp time arrangement must be established pursuant to the applicable provisions of a collective bargaining agreement, memorandum of understanding, any other agreement between the public agency and representatives of overtime-protected employees, or an agreement or understanding arrived at between the employer and employee before the performance of the work. This agreement may be evidenced by a notice to the employee that compensatory time off will be given in lieu of overtime pay (for example, providing the employee a copy of the personnel regulations). See 29 CFR 553.23.

Example: An admissions counselor at a large state university earns $38,000 a year. The advisor has a written agreement with the university that he will receive compensatory time at a rate of time and one-half for every overtime hour worked instead of overtime pay in cash. During a two-week period when admissions work is heavy, the advisor works 50 hours each of the two weeks and accumulates 20 hours of overtime, resulting in 30 hours of available comp time. The advisor then uses the comp time to take time off later in the year. This arrangement is permissible.

IV. Conclusion

The Overtime Rule updated the regulations to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-eligible workers, making the exemption easier for employers and workers to understand and apply. This guidance is provided to help employers in higher education understand their responsibilities and options for complying with the FLSA’s overtime provisions following publication of the Final Rule.


Guidance for Non-Profit Organizations on Paying Overtime under the Fair Labor Standards Act

May 18, 2016


Introduction

The Department of Labor (“Department”) recognizes and values the enormous contributions that non-profit organizations make to the country. Non-profit organizations provide services and programs that benefit vulnerable individuals in a variety of facets of life, including services that benefit those who the Department also works to protect by ensuring that their workplaces are fair, safe, and secure. The wide variety of non-profit organizations, from neighborhood activity organizations and small social service providers, to large health care providers and cultural institutions, also play an important role in the U.S. economy, employing millions of workers who provide these critical services and opportunities nationwide.

The Department’s Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees under the Fair Labor Standards Act (FLSA) (the “Overtime Rule” or “Final Rule”) updates the salary level required for the executive, administrative, and professional (“white collar”) exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-exempt employees. The Final Rule strengthens overtime protections and provides greater clarity for

workers and employers across a wide range of sectors, including non-profit organizations. As with most employees, the minimum wage and overtime provisions of the FLSA generally apply to employees at non-profits. This is not a change from the longstanding requirements of the FLSA. Non-profit employers, however, like other employers, are not required to pay minimum wages or overtime to executive, administrative, and professional employees who satisfy the salary level and other requirements to meet one of the white collar exemptions.

In the Final Rule, the Department updated the salary level above which certain “white collar” workers may be exempt from overtime pay requirements to equal the 40th percentile of earnings of full-time salaried workers from the lowest wage Census Region. This change raises the salary level from its previous amount of $455 per week (the equivalent of $23,660 per year) to a new level of $913 per week (the equivalent of $47,476 per year). Salaried white collar employees paid below the updated salary level are generally entitled to overtime pay, while employees paid at or above the salary level may be exempt from overtime pay if they primarily perform certain duties. The Final Rule also raises the compensation level for highly compensated employees subject to a more minimal duties test from its previous amount of $100,000 to $134,004 annually. These

changes take effect on December 1, 2016. The Final Rule also establishes a mechanism for automatically updating the salary and compensation levels every three years, with the first update to take place in 2020. The Final Rule does not include any changes to the duties tests, which also affect the determination of who is exempt from overtime.

The Department is issuing this guidance because during the development of the Final Rule, numerous organizations asked for clarification regarding how the FLSA generally, and the white collar exemptions specifically, apply to the non-profit sector. Additionally, the rulemaking process has brought into focus several issues and misunderstandings about the FLSA’s decades-long applicability to non-profits. Finally, because many non-profit organizations also engage in activities such as charitable functions and utilizing volunteers, both of which distinguish them from for-profit entities, this additional guidance may provide greater clarity about options and obligations under the FLSA. Part I of this guidance explains enterprise and individual coverage under the FLSA. Part II summarizes the white collar exemptions, and Part III details some of the options employers may exercise to ensure they comply with the Final Rule.

I. Coverage under the FLSA

In order to be subject to minimum wage and overtime requirements and thus qualify for the Act’s protections, employees must be “covered” by the FLSA. Coverage under the FLSA is usually achieved in one of two ways: (1) the organization is a covered enterprise; or (2) a particular worker is individually covered. While many non-profit organizations may not be covered enterprises under the FLSA, most non-profits are likely to have some employees who are covered individually and are therefore entitled to the minimum wage and overtime protections guaranteed by the FLSA. The Final Rule updating the overtime regulations for white collar employees did nothing to change this. However, in view of this rulemaking, non-profit organizations may be re-examining the rules governing FLSA coverage, and so the Department believes it is helpful to restate these longstanding coverage concepts. This guidance, however, is not a comprehensive guide to coverage and compliance under the FLSA. For additional detailed guidance documents, please visit the Wage and Hour Division’s website at dol.gov/whd.

A. Enterprise Coverage

To meet the enterprise coverage test, meaning that all employees working for that enterprise are covered by the FLSA’s protections unless an exemption applies, an entity must have annual revenues, that is, volume of sales made or business done, of at least $500,000.

As a general matter, non-profit organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities that result in sales made or business done that meet the $500,000 threshold. Ordinary commercial activities are activities such as operating a business, like a gift shop. Activities that are charitable in nature, however, are not considered ordinary commercial activities, and do not establish enterprise coverage. Examples of activities that are charitable in nature and normally provided free of charge include the following:

• providing temporary shelter;• providing clothing or food to homeless persons; • pr oviding sexual assault, domestic violence, or

other hotline counseling services; and• providing disaster relief provisions.

In determining whether a non-profit organization is a covered enterprise, the Wage and Hour Division (WHD) considers only activities performed for a business purpose. Additionally, income that a non-profit organization uses in furtherance of charitable activities is not factored into the $500,000 threshold. Such income might include contributions, membership fees, monetary and non-monetary donations, and dues (except for any portion for which the payer receives a benefit of more than token value in return).

Some non-profit organizations engaged in charitable activities may also manage revenue-producing activities that may bring the organization within the scope of the FLSA. If this side business produces revenue of at least $500,000 annually, the non-profit organization’s employees are entitled to the protections of the FLSA and the Department’s Overtime rule. See WHD Fact Sheet 14A.

Example1: A non-profit animal shelter provides free veterinary care, animal adoption services, and shelter for homeless animals. Even if the shelter takes in over $500,000 in donations in a given year, because the shelter engages only in charitable activities that do not have a business purpose,

1. All examples in this guidance are for purposes of illustration alone. Alteration of any of the facts in any of the examples could change the resulting analysis.

2. Guidance for Non-Profit Organizations on Paying Overtime under the Fair Labor Standards Act

dol.gov/whd

https://www.dol.gov/whd/regs/compliance/whdfs14a.htm

https://www.dol.gov/whd/regs/compliance/whdfs14a.htm

employees of the animal shelter are not covered on an enterprise basis.

Example: A non-profit organization operates a thrift store in which its employees sell donated items. The thrift store is engaged in commercial activity by selling goods. If the thrift store on its own generates revenue of at least $500,000 in a year, the non-profit’s employees are protected by the FLSA on an enterprise basis and are entitled to minimum wage and overtime protection unless a specific exemption applies.

Example: A non-profit organization operates a sandwich shop. Many of the employees that work in the restaurant, including cooks and wait staff, are individuals who were recently homeless. Even though the restaurant’s operation includes charitable purposes, the restaurant is engaged in ordinary commercial activities as it competes with other restaurants. If it generates revenue of at least $500,000 a year, the restaurant employees are protected by the FLSA on an enterprise basis and are entitled to minimum wage and overtime unless a specific exemption applies.

Regardless of the dollar volume of business, the FLSA applies to hospitals; institutions primarily engaged in the care of older adults and people with disabilities who reside on the premises; schools for children who are mentally or physically disabled or gifted; federal, state, and local governments; and preschools, elementary and secondary schools, and institutions of higher education. Accordingly, employees at these types of institutions (commonly referred to as “named enterprises”) are entitled to minimum wage and overtime protections unless a specific exemption applies.

B. Individual Coverage

Organizations that are not covered on an enterprise basis likely still have some employees who are covered individually and are therefore entitled to the FLSA’s protections.

Individual employee coverage is based on the nature of the particular employee’s work activities. An employee who engages in interstate commerce or in the production of goods for interstate commerce is covered by the FLSA. Employees whose work involves or relates to the movement of persons or things across state lines are also considered engaged in interstate commerce. Such activities include:

• making out-of-state phone calls;• receiving/sending interstate mail or electronic

communications; • ordering or receiving goods from an out-of-state

supplier; and• handling credit card transactions or performing the

accounting or bookkeeping for such activities.

The Department, however, will not assert that an employee, who on isolated occasions spends an insubstantial amount of time performing such work, is individually covered by the FLSA. Additionally, even where an employee regularly engages in interstate commerce and is individually covered, the Department focuses its enforcement efforts on circumstances where it can have significant impact on compliance, generally where there is enterprise coverage.

Example: An office manager at a non-profit organization regularly sends e-mails to out-of-state suppliers to purchase office materials and equipment. The employee is individually covered by the FLSA and entitled to its protections, including receiving minimum wage and overtime unless a specific exemption applies. Example: An employee works at a homeless shelter that regularly receives food and clothing donations from corporations located across state borders. The employee’s job duties consist of receiving and logging these donations. The employee is individually covered by the FLSA and entitled to its protections, including receiving minimum wage and overtime unless a specific exemption applies.

Example: An employee works at a shelter for domestic violence victims. The employee does not regularly use the telephone or computer for interstate communications and works only with clients from within the state. Because the employee is not engaged in substantial levels of activities involving interstate commerce, the employee is not covered by the FLSA on an individual basis.

II. Considerations for Non-Profit Organizations in Applying the White Collar Exemptions

The Overtime Rule does not change how the white collar exemptions’ duties tests apply to non-profit organizations. Nevertheless, a review of the baseline white collar exemption requirements will help clarify what has changed as a result of the Final Rule.


In the Final Rule, among other things, the Department updated the salary level from its previous amount of $455 per week (the equivalent of $23,660 per year) to $913 per week (the equivalent of $47,476 per year). The salary level is one of three tests for determining whether employees employed as executive, administrative, or professional employees are exempt from the FLSA’s minimum wage and overtime requirements. See 29 U.S.C. 213(a)(1); 29 CFR Part 541. These exemptions are sometimes referred to collectively as the “white collar” exemptions. The Final Rule also made changes to the highly compensated employee exemption and how bonuses are treated for purposes of determining an employee’s exempt status; those issues are not addressed in this guidance. For additional information on the Final Rule visit dol.gov/ whd/overtime/final2016/. Establishing that a white collar employee is exempt from the FLSA’s minimum wage and overtime requirements involves assessing how the employee is paid (salary basis test), how much the employee earns (salary level test), and whether the employee primarily performs the kind of job duties that Congress meant to exclude from the law’s overtime protections (duties test). Job titles never determine exempt status under the FLSA. Additionally, receiving a particular salary, alone, does not indicate that an employee is exempt from overtime and minimum wage protections. Rather, in order for a white collar exemption to apply, an employee’s specific

Job titles never determine

exempt status under the

FLSA. Additionally, receiving

a particular salary, alone,

does not indicate that an

employee is exempt from

overtime and minimum

wage protections.

job duties and earnings must meet all of the applicable requirements provided in the regulations. Not all salaried white collar employees qualify for the white collar exemptions; in fact, many salaried white collar employees are entitled to minimum wage and overtime.

Professional Exemption. There are several different kinds of exempt “professional” employees. These include “learned professionals,” “creative professionals,” teachers, and employees practicing law or medicine. Under the Final Rule, exempt professional employees must receive at least $913 a week (the equivalent of $47,476 a year) on a salary or fee basis (compared to $455 a week under the old rule), and must primarily perform work that either requires advanced knowledge in a field of science or learning, usually obtained through a degree, or that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

Many non-profits may employ certain professionals who will be unaffected by the new salary level. Specifically, the salary level and salary basis requirements do not apply to teachers, lawyers, or doctors (“bona fide practitioners of law or medicine”). See WHD Fact Sheet 17D.

Example: A non-profit legal clinic hires an attorney with a law degree. The attorney performs legal work for the clinic. The attorney is a bona fide professional, exempt from the FLSA’s provisions, regardless of whether she is paid on a salary basis or meets the salary level.

Administrative Exemption. To qualify for the administrative exemption, an employee must receive at least $913 a week (the equivalent of $47,476 a year) on a salary or fee basis, and the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. Additionally, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. See WHD Fact Sheet 17C.

Executive Exemption. To qualify for the executive exemption, an employee must receive compensation on a salary basis of not less than $913 per week (the equivalent of $47,476 a year), and have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. Additionally, the employee must customarily and regularly direct the work of at least two other full-time employees or their equivalent (for example, one full-time and two half-time employees


dol.gov/ whd/overtime/final2016/

dol.gov/ whd/overtime/final2016/

https://www.dol.gov/whd/overtime/fs17d_professional.htm

https://www.dol.gov/whd/overtime/fs17c_administrative.pdf

Overtime-eligible

employees may be paid

a salary and do not

need to be paid

on an hourly basis.

That is, salaried workers

may be eligible

for overtime.




Salary Basis Test •Employee must be paid on a salary basis



Standard Salary Level Test •$913 per week ($47,476 per year for a full-year

worker)





Standard Duties Test •The employee’s “primary duty” must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise (and managing 2 full- time employees as well).

•Additional requirements provided in 29 CFR 541 Subpart B



• The employee’s “primary duty” must be to primarily perform work that either requires advanced knowledge in a field of science or learning or that requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.


are equivalent to two full-time employees), and have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. See WHD Fact Sheet 17B.

For more information on all of the white collar exemptions, see WHD Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees under the Fair Labor Standards Act (FLSA).

III. Options for Compliance for Employers Who Might be Impacted by the Final Rule

Like other employers, non-profit organizations have a wide range of options for responding to the changes to the salary level, and the Department does not dictate or recommend any method. Non-profit organizations may ensure compliance for those employees affected by the Final Rule in a number of ways, including providing pay raises that increase workers’ salaries to the new threshold, spreading employment by reducing or eliminating work hours of individual employees working

over 40 hours per week for which no overtime is being paid, or paying overtime. This rule does not require employers to convert a salaried worker making less than the new salary threshold to hourly

https://www.dol.gov/whd/overtime/fs17b_executive.pdf





status: employers can pay non-exempt employees on a salary basis and pay overtime for hours worked beyond 40 in a week. As long as they are complete and accurate, employers may use any method they choose for tracking and recording hours. The method for compliance, which is entirely within each employer’s discretion, will likely depend on the circumstances of that institution’s workforce, including how much employees currently earn and how often employees work overtime, and may include a combination of responses, such as paying overtime and adjusting employees’ hours and schedules. Some potential responses for non-profit organizations are discussed below.








Adjust wages

Most affected employees do not work overtime (OT)

60%don’t work OT

20%regularly work OT

19%occasionally

work OT

*Totals don’t sum to 100 due to rounding. For more information, please see Section VI of the Final Rule.



Many non-profit organizations may have white collar employees who satisfy one of the duties tests for exemption and earn between the old salary level ($455 per week) and the new salary level ($913 per week). Employers should evaluate all such categories of white collar employees to determine which employees do not work more than 40 hours per workweek. The Final Rule will have no effect on these employees’ pay because they do not work any overtime even though they will become overtime-protected. They can continue to be paid a salary as before.

Example: The manager of an out-patient clinic performs the duties of a bona fide administrator and is paid a fixed salary of $42,000 a year. The clinic is open from 10am-4pm, Tuesday through Saturday. The manager regularly works from 9am-5pm, Tuesday through Saturday. Because of the change in the salary level, the manager is no longer an exempt employee. Nevertheless, the Final Rule has no impact on the manager’s pay, because the manager does not work more than 40 hours in a given week. The clinic can continue to pay the manager a fixed salary of $42,000 a year.

ii. Raise salaries

Employers may choose to raise the salaries of employees who meet the duties tests, whose salaries are close to the new salary level, and who regularly work

overtime, to at or above the salary level to maintain their exempt status.

Example: An operations manager at an international human rights non-profit organization is paid a salary of $45,000 a year. Her job duties qualify her for the administrative exemption. The manager’s job requires regularly working overtime to direct business operations in multiple time zones. The employer may choose to raise the manager’s salary to at or above $47,476 a year to maintain the manager’s administrative exemption.


Employers also can continue to pay employees a salary and pay overtime for hours in excess of 40 per week. Although the FLSA requires employers to keep records of how many hours overtime-eligible employees work, the law does not require that overtime-eligible workers be paid on an hourly basis. Rather, non-profit organizations may continue to pay employees a salary covering a fixed number of hours, which could include hours above 40. There are several ways to pay a salary and pay overtime.


Example: Alexa, a development manager for a cultural institution, earns a fixed salary of $41,600 per year ($800 per week) for a 40 hour workweek. Because her salary is for 40 hours per week, Alexa’s regular rate is $20 per hour. If Alexa works 45 hours one particular week, the employer would pay time and one-half (overtime premium) for five hours at a rate of $30 per hour. Thus, for that week, Alexa should be paid $950, consisting of her $800 per week salary and $150 overtime compensation.


Employers can also pay

non-exempt employees on

a salary basis and pay

overtime for hours worked

beyond 40 in a week.

As long as they are

complete and accurate,

employers may use

any method they choose

for tracking and

recording hours.


Example: Jamie, an HR manager at a community loan fund, earns a fixed salary of $44,200 per year ($850 per week) for a 50 hour workweek. The salary does not include the overtime premium. Because the salary is for 50 hours per week, Jamie’s regular rate is $17 ($850/50). In a normal 50 hour week, the employer would pay Jamie the additional half time overtime premium for the 10 hours of overtime ($8.50 per hour). If Jamie worked more than 50 hours in a week, the employer would also owe overtime compensation at time and a half the regular rate ($17 x 1.5) for hours beyond 50 (because the salary does not cover any payment for those hours).

It is also possible for an employer and employee to agree to a fixed salary for a workweek of more than 40 hours, in which the salary includes overtime compensation under certain conditions. If, however, the employee’s schedule changes in any way during any week (either by working more or fewer hours), the employer must adjust the salary for that week. Employees must be paid based on the hours actually worked during the workweek. This method of paying for overtime, therefore, might be most helpful for employees who consistently work the same amount of overtime every week.

Example: Andre, a program manager at a non-profit organization, has an agreement with his organization where he is paid a fixed salary of $39,520 per year ($760 per week) for a 45 hour workweek. The fixed salary includes both straight time for the first 40 hours ($16 regular rate x 40 hours) and overtime compensation for hours 41-45 ($24 overtime rate x 5 hours). If Andre’s schedule changes in any way for any week, his salary needs to be adjusted to reflect the hours actually worked for that week.

Finally, where employees have hours of work that fluctuate from week to week, employers can pay a fixed salary that covers a fluctuating number of hours at straight time if certain conditions are met, including a clear mutual understanding between the employer and employee. See 29 CFR 778.114 for additional information and criteria for this payment method.

Any overtime-eligible employee may continue to be paid a salary, provided that overtime compensation is also paid and appropriately documented in the employer’s record. Non-profit organizations may already have systems in place for tracking non-exempt employees’ hours. These existing systems can be used for newly overtime-protected employees impacted by the Overtime Rule. As long as they are complete and

Non-profit organizations

may already have systems

in place for tracking

non-exempt employees’

hours. These existing

systems can be used for

newly overtime-protected

employees impacted by the

Overtime Rule.


accurate, employers may use any method they choose for recording hours. Employers may use their own system to keep track of employees’ work hours or require employees to enter their own time into payroll programs. See WHD Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA).

There is no requirement that employees “punch in” and “punch out.” An employer does not need to require an employee to sign in each time she starts and stops work. The employer must, however, keep an accurate record of the number of daily hours worked by the employee. To do so, an employer could allow an employee to just provide the total number of hours worked each day, including the number of overtime hours, by the end of each pay period. For employees who work a fixed schedule, a non-profit organization need not track the employee’s exact hours worked each day; rather, the employer and employee can agree to a default schedule that reflects daily and weekly hours, and indicate that the employee followed the agreed-upon schedule, if that is true. Only when the employee deviates from the schedule is the employer required to record the number of hours worked each day. Many employees, both exempt and non-exempt, track their daily and weekly hours by simply recording their hours worked for the employer.

iv. Reorganize Workloads, Adjust Schedules or Spread Work Hours

Employers may wish to reorganize workload distributions or adjust employee schedules in order to comply with the Final Rule. For example, work assignments that are predictable could be assigned at the beginning of the workweek (rather than, for instance, late in the day on Friday for an employee who typically works Monday—Friday) in order to manage overtime hours. Or, when employees regularly perform duties outside of a 9 to 5 workday, non-profit organizations may consider adjusting those employees’ schedules to encompass when most of the work takes place, so that they will not work more than 40 hours each workweek. (The FLSA does not specify days or schedules, such as a Monday—Friday workweek or a 9 to 5 workday; this is provided only as an example of a schedule that many workers follow.)

Example: John, a manager at a charity consignment shop (subject to FLSA coverage) who satisfies the duties test, currently begins work at 8am Monday—Friday. Under the Final Rule’s new salary level, he would be newly entitled to overtime compensation. Among other duties, John accepts donations to the shop from donors, and the busiest time for drop-offs is always between 4pm—6pm,

so John routinely works until 6:30pm. The shop may wish to adjust John’s schedule such that he doesn’t need to begin work until 10am, thus limiting the number of overtime hours he works.

To reduce or eliminate overtime hours, employers may decide to hire new employees or redistribute work hours in excess of 40 across current staff, such as by increasing the work hours of staff who work less than 40 hours per week.

v. Adjust Wages

Employers can adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime so that the total amount paid to the employee remains largely the same. Employers may not, however, reduce an employee’s hourly wage below the highest applicable minimum wage (federal, state, or local), or continually adjust wages each workweek in order to manipulate the regular rate. The employees’ hours worked must still be recorded, and overtime must be paid according to the actual number of hours worked each week.

Example: Assume a fundraising supervisor at a non-profit who satisfies the duties test for the executive exemption earns $37,000 per year ($711.54 per week). The supervisor regularly works 45 hours per week. The employer may choose to instead pay the employee an hourly rate of $15 and pay time and one-half for the 5 overtime hours worked each week.

$600.00 (40 hours x $15 / hour)

+ $112.50 (5 OT hours x $15 x 1.5)

$712.50 per week

Alternatively, the employer may choose to pay that employee a salary for 40 hours of $600 per week and pay the overtime for hours in excess of 40 per week.


+ $112.50 (5 OT hours x $15 x 1.5)

$712.50 per week





B. Use of Volunteers

Unlike most other employers, some non-profit organizations may use volunteer services if certain conditions are met. The Final Rule in no way changes the rules governing when non-profit organizations may use volunteers, but as non-profit organizations evaluate the classification of their employees in light of the Final Rule, they may have questions about the appropriate use of volunteers, which is briefly addressed here.

A volunteer generally will not be considered an employee for purposes of the FLSA if the individual volunteers freely for public service, religious, or humanitarian objectives, and without contemplation or receipt of compensation. Under the FLSA, employees may not volunteer services to for-profit private sector employers. Also, individuals generally may not volunteer in commercial activities run by a non-profit organization (such as a gift shop).

Under the FLSA, a person who works in a volunteer role must be a bona fide volunteer. Some examples of the many ways in which volunteers may contribute to an organization include:

• members of civic organizations may help out in a community rehabilitation program;

• men’s or women’s organizations may send members to adult day care centers to provide certain personal services for the sick or elderly;

• individuals may volunteer to perform such tasks as driving vehicles or assisting with disaster relief; and

• individuals may volunteer to work with children with disabilities or disadvantaged youth, helping in youth programs as camp counselors, scoutmasters, den mothers, providing child care assistance for needy working parents, soliciting contributions or participating in benefit programs for such organizations, and volunteering other services needed to carry out their charitable, educational, or religious programs.

Generally, volunteers serve on a part-time basis and should not displace employees or perform work that would otherwise typically be performed by employees. Additionally, paid employees of non-profit organizations

may not volunteer to provide the same type of services to the non-profit organization that they are otherwise typically employed to provide.

Example: A non-profit medical clinic has an office manager who handles office operations and procedures. The clinic hosts an annual 5K fun run in order to raise funds for its free services. In past years, the office manager also spent time on race day working by registering runners the morning of the run. Newly non-exempt under the Final Rule, the non-profit clinic may permissibly choose to utilize more volunteers this year to register runners instead of tasking the office manager with that assignment (provided all the conditions for bona fide volunteers are met), thus avoiding the accumulation of overtime hours in that week for the office manager.

Example: Using the same facts as above, many other individuals from the community volunteer on race day. The volunteer activities, such as packet pickups, course marshaling, water distribution, and staffing food tables at the finish line, are activities that are not typically performed by employees of the medical clinic. Based on these facts, the individuals are likely bona fide volunteers.

As noted, volunteer work is performed without the expectation of compensation.

IV. Conclusion

As with most employees, the minimum wage and overtime provisions of the FLSA generally apply to employees at non-profit agencies. This is not a change, as neither the FLSA nor the Department’s regulations provide an exemption from the law’s requirements for non-profit organizations. Given the potential impact of the Final Rule on non-profit organizations, the Department is issuing this guidance to clarify the longstanding application of the white collar exemptions in the non-profit context to assist non-profit organizations in understanding their options and obligations under the Final Rule.

For additional information, please visit www.dol.gov/whd.


www.dol.gov/whd

Introduction

• New rule released May 18, 2016

• Updates the Fair Labor Standard Act’s overtime regulations regarding the executive, administrative and professional exemptions (“white collar exemptions”)

• Exemptions created by Section 13(a)(1) of the FLSA

• Exemptions defined and explained in 29 C.F.R. Part 541

1

The Proposed Rule

• Five key parts:- Standard salary level pegged to 40th percentile of salaried

wages on a national basis- Highly compensated employees level pegged to 90th percentile

of salaried wages on a national level- Annual updating of salary levels- Comments sought on nondiscretionary bonuses- Comments sought on duties test

August 1, 2014Sexual Orientation and Transgender Discrimination Claims2

Public Comments

• Employees largely supportive

• Employers’ chief complaints:- Salary level too high and should reflect regional wage

variations- Updating of salary levels should be scrapped or phased in- Nondiscretionary bonuses should be included- Duties test should not be changed


The Final Rule

• Minimum salary for EAP exemptions increased from $455 per week ($23,660 per year) to $913 a week ($47,476 per year).- A smaller increase than the proposed rule

• Increases the threshold for exemption as a “highly compensated employee” (“HCE”) from $100,000 to $134,004 per year. - A larger increase than the proposed rule

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Inclusion of Nondiscretionary Bonuses

• Up to ten percent of the salary threshold for non-HCE employees can be met by non-discretionary bonuses, incentive pay, or commissions.- Such payments must be paid on a quarterly or more frequent

basis to count towards the salary level test. - Employers may make a “catch-up” payment no later than the

next pay period after the end of the quarter. - Any such “catch-up” payment counts only toward the prior

quarter’s salary.

5

Increases Every Three Years

• DOL will update the salary threshold every three years. - The first update will be January 1, 2020- Each update will raise the standard threshold to the 40th

percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020

- The HCE threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.

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Duties test has not changed

• Revision to current duties test not warranted given changes to salary levels


Guidance Explains What the Changes Will Mean

• Currently exempt EAP employees earning less than $47,476 per year will no longer be exempt as of December 1, 2016

• Employers with exempt EAP employees currently in the $23,660 to $47,476 salary range will have to select from a number of options to comply with the new rule- E.g., increase salary, reclassify to overtime-eligible

• Teachers, academic administrative personnel, physicians, attorneys, and outside sales persons are not subject to the EAP salary level test

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HCE Level Increase: Does It Matter?

• Employees are entitled to the protections of state law, if broader than the FLSA

• The HCE exemption is a federal construct, created in 2004

• If the state your employee works in does not adopt or follow the FLSA exemptions or otherwise recognize a “highly compensated employee” exemption, the federal HCE exemption won’t help you avoid state law overtime liability for that employee

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Alternatives to Paying an Hourly Rate

• Ability to pay a salary to overtime-eligible employees

• Fixed salary for 40 hours per week

• Fixed salary for fewer than 40 hours per week

• Salary covering more than 40 hours per week

• Fixed salary for fluctuating hours

10

U.S. Department of Labor Wage and Hour Division

(May 2016)

Fact Sheet: Final Rule to Update the Regulations Defining and Delimiting the Exemption for Executive, Administrative, and Professional Employees

In 2014, President Obama directed the Department of Labor to update and modernize the regulations governing the exemption of executive, administrative, and professional (“EAP”) employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act (“FLSA” or “Act”). The Department published a notice of proposed rulemaking on July 6, 2015, and received more than 270,000 comments. On May 18, 2016, the Department announced that it will publish a Final Rule to update the regulations. The full text of the Final Rule will be available at the Federal Register Site.

Although the FLSA ensures minimum wage and overtime pay protections for most employees covered by the Act, some workers, including bona fide EAP employees, are exempt from those protections. Since 1940, the Department’s regulations have generally required each of three tests to be met for the FLSA’s EAP exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”). The Department last updated these regulations in 2004, when it set the weekly salary level at $455 ($23,660 annually) and made other changes to the regulations, including collapsing the short and long duties tests into a single standard duties test and introducing a new exemption for highly compensated employees.

This Final Rule updates the salary level required for exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify the identification of overtime-protected employees, thus making the EAP exemption easier for employers and workers to understand and apply. Without intervening action by their employers, it extends the right to overtime pay to an estimated 4.2 million workers who are currently exempt. It also strengthens existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers whose entitlement to overtime pay will no longer rely on the application of the duties test.

* Key Provisions of the Final Rule *

The Final Rule focuses primarily on updating the salary and compensation levels needed for EAP workers to be exempt. Specifically, the Final Rule:

1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in thelowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for afull-year worker;

2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject toa minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workersnationally, which is $134,004; and

1 WHFR29CFR541

3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. The Final Rule makes no changes to the duties tests. Effective Date The effective date of the Final Rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020. Standard Salary Level The Final Rule sets the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week, equivalent to $47,476 per year for a full-year worker). The standard salary level set in this Final Rule addresses our conclusion that the salary level set in 2004 was too low given the Department’s elimination of the more rigorous long duties test. For many decades the long duties test—which limited the amount of time an exempt employee could spend on nonexempt duties and was paired with a lower salary level—existed in tandem with a short duties test—which did not contain a specific limit on the amount of nonexempt work and was paired with a salary level that was approximately 130 to 180 percent of the long test salary level. In 2004, the long and short duties tests were eliminated and the new standard duties test was created based on the short duties test and was paired with a salary test based on the long test. The effect of the 2004 Final Rule’s pairing of a standard duties test based on the short duties test (for higher paid employees) with a salary test based on the long test (for lower paid employees) was to exempt from overtime many lower paid workers who performed few EAP duties and whose work was otherwise indistinguishable from their overtime-eligible colleagues. This has resulted in the inappropriate classification of employees as EAP exempt who pass the standard duties test but would have failed the long duties test. The Final Rule’s salary level represents the most appropriate line of demarcation between overtime-protected employees and employees who may be EAP exempt and works appropriately with the current duties test, which does not limit non-EAP work. The Department also is updating the special salary level for employees in American Samoa (to $767 per week) and the special “base rate” for employees in the motion picture industry (to $1,397 per week). HCE Total Annual Compensation Requirement The Final Rule sets the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually). To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test. The HCE annual compensation level set in this Final Rule brings this threshold more in line with the level established in 2004 and will avoid the unintended exemption of large numbers of employees in high-wage areas who are clearly not performing EAP duties.

2

Automatic Updating The Final Rule includes a mechanism to automatically update the standard salary level requirement every three years to ensure that it remains a meaningful test for distinguishing between overtime-protected white collar workers and bona fide EAP workers who may not be entitled to overtime pay and to provide predictability and more graduated salary changes for employers. Specifically, the standard salary level will be updated to maintain a threshold equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. Similarly, the Final Rule includes a mechanism for automatically updating the HCE compensation level to maintain the threshold equal to the 90th percentile of annual earnings of full-time salaried workers nationally. The Final Rule will also automatically update the special salary level test for employees in American Samoa and the base rate test for motion picture industry employees. The Department will publish all updated rates in the Federal Register at least 150 days before their effective date, and also post them on the Wage and Hour Division’s website. Regularly updating the salary and compensation levels is the best method to ensure that these tests continue to provide an effective means of distinguishing between overtime-eligible white collar employees and those who may be bona fide EAP employees. Experience has shown that these earning thresholds are only effective measures of exempt status if they are kept up to date. Inclusion of Nondiscretionary Bonuses and Incentive Payments For the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. Such payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, the Final Rule requires such payments to be paid on a quarterly or more frequent basis and permits the employer to make a “catch-up” payment. The Department recognizes that some businesses pay significantly larger bonuses; where larger bonuses are paid, however, the amount attributable toward the standard salary level is capped at 10 percent of the required salary amount. The Final Rule continues the requirement that HCEs must receive at least the full standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments, and continues to permit nondiscretionary bonuses and incentive payments (including commissions) to count toward the total annual compensation requirement. The Department concludes that permitting employers to use nondiscretionary bonuses and incentive payments to satisfy the standard salary amount for HCEs is not appropriate because employers are already permitted to fulfill almost two-thirds of the total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation. Duties Tests The Final Rule is not changing any of the existing job duty requirements to qualify for exemption. The Department expects that the standard salary level set in this Final Rule and automatic updating will work effectively with the duties test to distinguish between overtime-eligible workers and those who may be exempt. As a result of the change to the salary level, the number of workers for whom employers must apply the duties test to determine exempt status is reduced, thus simplifying the exemption. Both the standard duties test and the HCE duties test remain unchanged.

3

For additional information, visit our Wage and Hour Division Website: www.wagehour.dol.gov and/or call our toll-free information and helpline, available 8 a.m. to 5 p.m. in your time zone, 1-866-4-USWAGE (1-866-487-9243). This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations. U.S. Department of Labor Frances Perkins Building 200 Constitution Avenue, NW Washington, DC 20210

1-866-4-USWAGE TTY: 1-866-487-9243

Contact Us

4

http://www.dol.gov/whd

http://www.dol.gov/esa/whd/contactForm.asp

Overtime Final Rule and State and Local Governments

UNITED STATES DEPARTMENT OF LABOR

State and local governments: The Fair Labor Standards Act (“FLSA”) has long applied to state and local governments. The FLSA and the Department’s regulations, however, contain some unique provisions applicable only to public sector workers, notably the permitted use of compensatory time off, under certain conditions. These provisions will help state and local governments adapt to the overtime final rule.

Overtime Final Rule: The Department of Labor’s final overtime rule updates the salary level required for the executive, administrative, and professional (“white collar”) exemption to ensure that the FLSA’s intended overtime protections are fully implemented, and it provides greater clarity for white collar workers and their employers, including for state and local governments. The rule also will lead to better work-life balance for many workers, and it can benefit employers by increasing productivity and reducing turnover.

The final rule updates the salary threshold under which most white collar workers are entitled to overtime to equal the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census region, currently the South. The final rule raises the salary threshold from $455 a week ($23,660 for a full-year worker) to $913 a week ($47,476 for a full-year worker) effective December 1, 2016.

The FLSA and State and Local Governments

Neither the FLSA nor the Department’s regulations provide a blanket exemption from overtime require-ments for state and local governments, nor for public sector workers. However, the FLSA contains several provisions unique to state and local governments, including compensatory time (“comp time”).

Comp time: Pursuant to an agreement with employees or their representatives, state or local government agencies may arrange for their employees to earn comp time instead of cash payment for overtime hours. Any comp time arrangement must be established pursuant to the applicable provisions of a collective bargaining agreement, memorandum of understanding, any other agreement between the public agency and representatives of overtime-protected employees, or an agreement or understanding arrived at between the employer and employee before the performance of the work. This agreement may be evidenced by a notice to the employee that compensatory time off will be given in lieu of overtime pay (for example, providing the employee a copy of the personnel regulations). The comp time must be provided at a rate of one-and-one-half hours for each overtime hour worked. For example, for most state government employees, if they work 44 hours in a single workweek (4 hours of overtime), they would be entitled to 6 hours (1.5 times 4 hours) of compensatory time off. When used, the comp time is paid at the regular rate of pay.

Most state and local government employees may accrue up to 240 hours of comp time. Law enforcement, fire protection, and emergency response personnel, as well as employees engaged in seasonal activities (such as employees processing state tax returns) may accrue up to 480 hours of comp time. An employee must be permitted to use comp time on the date requested unless doing so would “unduly disrupt” the operations of the agency.

Fire and police small-agency exemption: The FLSA also provides an exemption from overtime protection for fire protection or law enforcement employees, if they are employed by an agency that employs fewer than five fire protection or law enforcement employees, respectively.

“Work periods” rather than “workweeks” for fire protection or law enforcement employees: Employees engaged in fire protection or law enforcement may be paid overtime on a “work period” basis, rather than the usual 40-hour workweek of the FLSA. A “work period” may be from 7 consecutive days to 28 consecutive days in length. Overtime compensation is required when an employee’s hours worked in the work period exceed the maximum hours outlined in a formula in the Department’s regulations. For example, for a law enforcement employee who works a 14-day work period, the Department’s regulations provide that she must receive overtime compensation after working 86 hours in the work period. See FLSA Fact Sheet #7 and Fact Sheet #8 for more information.

Impact Is Limited by Other Rules and Exemptions: Many employees of state and city governments won’t be affected by the final rule:

• Hourly w orkers: The new threshold will have no im-pact on the pay of workers paid hourly. Generally, all hourly workers—including those employed by state and local government—are entitled to overtime pay or comp time regardless of how much they make if they work more than 40 hours. Nothing in the new rule changes that.

• W orkers with regular workweeks of 40 or fewer hours: To the extent that many salaried white-collar staff in state and local government have office jobs where they work no more than 40 hours, the changes to the overtime rules will have no effect on their pay. Additionally, for law enforcement and fire protection employees who regularly work hours that conform to the longer work periods permitted for such em-ployees, the changes will also not impact their pay.

• W orkers who fail the duties test: Salaried workers who do not primarily perform executive, administrative, or professional duties are not eligible for the white collar overtime exemption and therefore are not affected by the final rule. Those employees already should be getting paid overtime for any hours they work over 40 in one week (or the applicable work period maximum for fire protection and law en-forcement employees), as long as comp time is not available.

• Highly c ompensated workers: White collar workers who fail the standard duties test but are “highly compensated”—earn more than $134,004 in a year—are almost all ineligible for overtime under

the highly compensated employee exemption, which has a minimal duties test. This exemption would cover some high-level managers in state and local government. (You can see more information on HCE duties in WHD Fact Sheet #17H.)

• Police and fire employees in small agencies: Fire protection or law enforcement employees in public agencies with fewer than five fire protection or law enforcement employees respectively will continue to be exempt from overtime.

• Elected officials, their policymaking appointees, and their personal staff and legal advisors who are not subject to civil service laws: These state and local government employees are not covered by the FLSA and will not be impacted by the rule.

• L egislative branch employees who are not subject to civil service laws: These state and local government employees are not covered by the FLSA and will not be impacted by the rule.

• P ublic employees who have a comp time arrangement: By agreement, public sector employers can satisfy their overtime obligation by providing comp time rather than paying a cash overtime premium. State and local government employers may continue to use comp time to satisfy their overtime obligations to employees who have not accrued the maximum number of comp time hours.

State and Local Government Employers Have Discretion to Choose Between Several Options for Complying with the Final Rule

The Department does not dictate what option employers should use to comply with the revised regulations. In fact, many options are available to employers for complying with the new salary threshold. These options include:

• R aise salaries: For workers whose salaries are close to the new threshold and who pass the duties test, em-ployers may choose to raise these workers’ salaries to meet the new threshold and maintain their exempt status.

• Pay overtime above a salary: State and local gov-ernment employers also can continue to pay new-ly-eligible employees a salary and pay overtime, or provide comp time for overtime hours in excess of 40 per week. The law does not require that newly overtime-eligible workers be converted to hourly pay status. This approach works for employees who

2. OVERTIME FINAL RULE AND STATE AND LOCAL GOVERNMENTS



https://www.dol.gov/whd/overtime/fs17h_highly_comp.pdf

usually do not work overtime, but have occasional “spikes” or periods that require overtime hours. State and local government employers can either plan and budget the extra pay during those periods or provide comp time. o F or an employee who works a fixed schedule that

rarely varies, the employer may simply keep a record of the schedule and indicate the number of hours the worker actually worked only when the worker varies from the schedule.

o For an employee with a flexible schedule, an employer does not need to require an employee to sign in each time she starts and stops work. The employer must keep an accurate record of the number of daily hours worked by the employee.

So an employer could allow an employee to just provide the total number of hours she worked each day, including the number of overtime hours, by the end of each pay period.

• Evaluate and realign employee workload: Employers can limit the need for employees to work overtime by ensuring that workloads are distributed to re-duce overtime, that staffing levels are appropriate for the workload, and that workers are managing their time well.

• U tilize comp time: State and local government em-ployers—unlike private sector employers—can pro-vide comp time rather than cash overtime payments in appropriate circumstances.

3. OVERTIME FINAL RULE AND STATE AND LOCAL GOVERNMENTS

Overtime Final Rule and Higher Education


Higher Education Sector: Higher education is a complex and important sector in our economy and civil society. It includes a large variety of institutions: public and private schools; community colleges, four-year colleges, and large research institutions; and small campuses of only a few hundred students and faculty and large campuses of thousands of people.

Overtime Final Rule: The Department of Labor’s final overtime rule updates the salary level required for the executive, administrative, and professional (“white collar”) exemption to ensure that the Fair Labor Standards Act’s (FLSA) intended overtime protections are fully implemented, and it provides greater clarity for workers and employers, including for higher education institutions. The final rule will also lead to better work-life balance for many workers, and it can benefit employers by increasing productivity and reducing turnover.

The final rule updates the salary threshold under which most white collar workers are entitled to overtime compensation to equal the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census region, currently the South. The final rule will raise the salary threshold from $455 a week ($23,660 for a full-year worker) to $913 a week ($47,476 for a full-year worker) effective December 1, 2016.

FLSA Includes Several Provisions that Limit Its Impact for Higher Ed: Although employees at higher education institutions are generally covered by the FLSA’s minimum wage and overtime provisions, several provisions apply to many personnel at these institutions that make them ineligible for overtime and unaffected by this rule, regardless of whether they earn above the new salary threshold or not:

• Bona fide teachers: Teachers are not subject to the salary level requirement for the white collar exemp-tion. Teachers are exempt if their primary duty is teaching, tutoring, instructing, or lecturing. Teachers include professors, adjunct instructors, and teachers

of skilled and semi-skilled trades and occupations. • Coaches: Athletic coaches and assistant coaches

may fall under the exemption if their primary duty is teaching, which may include instructing athletes in how to perform their sport. If, however, their duties primarily include recruiting athletes or doing manual labor, they are not considered teachers. A coach could primarily be responsible for instruct-ing athletes but also spend some time recruiting or doing manual labor and still be considered ineligible for overtime.

• Gr aduate and undergraduate students: Generally, the Department views graduate and undergraduate stu-dents who are engaged in research under a faculty member’s supervision in the course of obtaining a degree to be in an educational relationship and not an employment relationship with the school or with a grantor. As such, the Department will not assert such workers are entitled to overtime. Graduate students whose primary duty is teaching or serving as a teaching assistant fall under the FLSA’s teaching exemption. Students who are participants in a bona fide educational program and who serve as resident advisors in exchange for reduced room and board charges or tuition credit similarly are not consid-ered to be in an employment relationship with the institution.

• Academic administrative personnel: The adminis-trative personnel that help run higher education institutions and interact with students outside the classroom, such as department heads, academic counselors and advisors, intervention specialists and others with similar responsibilities are subject to a special salary threshold that does not apply to white-collar employees outside of higher educa-tion. These employees are not entitled to overtime compensation if they are paid at least as much as the entrance salary for teachers at their institution.

Public Higher Education Institutions May Utilize Provisions for State and Local Employees: Employees of public higher education institutions may also be public sector employees for whom specific provisions

in the FLSA will further limit the impact of the final rule. Specifically, public institutions may be able to use compensatory (“comp”) time as an option to satisfy their obligation to provide overtime compensation.

Comp time: Pursuant to an agreement with employees or their representatives, state or local government agencies, including higher education institutions whose employees are treated as state employees under state law, may provide their employees with comp time instead of cash payment for overtime hours. Any comp time arrangement must be established pursuant to the applicable provisions of a collective bargaining agreement, memorandum of understanding, any other agreement between the public agency and representatives of overtime-protected employees, or an agreement or understanding arrived at between the employer and employee before the performance of the work. This agreement may be evidenced by a notice to the employee that comp time will be given in lieu of overtime pay (for example, providing the employee a copy of the personnel regulations). The comp time must be provided at a rate of one-and-one-half hours for each overtime hour worked, instead of cash overtime pay. For example, for most state government employees, if they work 44 hours in one workweek (4 hours of overtime), they would be entitled to 6 hours (1.5 times 4) of comp time. When used, the comp time is paid at the regular rate of pay.

Most state and local government employees may accrue up to 240 hours of comp time. Employees engaged in seasonal activities (such as admissions counselors) may accrue up to 480 hours of comp time. An employee must be permitted to use comp time on the date requested unless doing so would “unduly disrupt” the operations of the agency.

Higher Ed Impact Is Limited by Other Rules and Exemptions: Many employees of higher-education institutions will not be affected by the rule, even if they do not qualify for the special rules for teachers:

• Hourly workers: The new threshold has no impact on the pay of workers paid hourly. Generally, hourly workers are entitled to overtime regardless of how much they make if they work more than 40 hours – nothing in the new rule changes that.

• Workers with regular workweeks of 40 or fewer hours: To the extent that many salaried white-collar employees at higher-education institutions have office jobs where they work no more than 40 hours, the changes to the overtime rules will have no effect on their pay.• Workers who fail the duties test: Salaried workers who

do not primarily perform executive, administrative, or professional duties are not eligible for the white collar overtime exemption and therefore are not affected by the final rule. Those employees already should be getting paid overtime for any hours they work over 40 in one week.

• Highly compensated workers: White collar workers who fail the standard duties test but are “highly compensated”—earn more than $134,004 in a year—are almost all ineligible for overtime under the highly compensated employee exemption, which has a minimal duties test. This exemption would cover some high-level managers at institutions of higher education. (You can see more information on HCE duties in WHD Fact Sheet #17H.)

A Limited Number of Higher Education Workers Will Be Affected: The overtime rule will impact limited groups of workers at higher-education institutions, including:

• Postdoctoral researchers: o Sciences: Postdoctoral researchers in the sciences

are not covered by the teaching exemption. These employees are generally considered professional employees and are subject to the salary threshold for exemption from overtime. DOL has been working closely with NIH and NSF regarding their mutual interest in this area.

o Humanities: Many postdoctoral researchers in the humanities also teach. To the extent that they have a primary duty of teaching, they will be subject to the teaching exemption and not entitled to overtime compensation. If they do not teach, however, and earn less than the new threshold, they will be eligible for overtime.

• Non-academic administrative employees: For administrative employees who do not meet the special provision for academic administrative employees, such as admission counselors and re-cruiters, they will be eligible for overtime if they

2. OVERTIME FINAL RULE AND HIGHER EDUCATION


earn below the salary level set in the final rule and they work more than 40 hours in a week.

• Other salaried workers: To the extent that high-er-education institutions employ workers whose duties are not unique to the education setting—like managers in food service or supervisors of security guards—they will be covered by the final rule, just like their counterparts at other kinds of institutions and businesses, unless another exemption applies.

Higher Education Employers Have Discretion to Choose Between Several Options

The Department does not dictate what option employers should use to comply with the revised regulations. In fact, many options are available to all employers for complying with the new salary threshold. These options include:

• Raise salaries: For workers whose salaries are close to the new threshold and who meet the duties test, employers may choose to raise these workers’ sala-ries to meet the new threshold and maintain their exempt status.

• Evaluate and realign employee workload: Employers can limit the need for employees to work overtime by ensuring that workloads are distributed to mini-mize overtime and that staffing levels are appropri-ate for the workload.

• Pay overtime above a salary: Employers also can continue to pay newly overtime-eligible employees a salary basis and pay overtime for hours in excess of 40 per week. The law does not require that newly overtime-eligible workers be paid on an hourly basis. This approach works for employees who usually

work 40 hours or fewer, but have seasonal “spikes” or periods of activity when overtime hours are required, for which employers can plan and budget the extra pay during those periods. o F or employees who work a fixed schedule that

rarely varies, the employer may simply keep a record of the schedule and indicate the number of hours the worker actually worked only when the worker varies from the schedule.

o For an employee with a flexible schedule, an employer does not need to require an employee to sign in each time she starts and stops work. The employer must keep an accurate record of the number of daily hours worked by the employee. So an employer could allow an employee to just provide the total number of hours she worked each day, including the number of overtime hours, by the end of each pay period.

• For public schools, utilize comp time: Public sector employers—unlike private sector employers—can provide comp time at time and one-half rather than cash overtime payments, in appropriate circumstances.

• A djust employees’ base pay and pay overtime: Em-ployers can adjust the amount of an employee’s earnings to reallocate it between regular wages and overtime pay. This method works for employees who work a relatively small amount of predictable overtime. The revised pay may be on a salaried or hourly basis (there is no requirement to convert workers to hourly pay status), but it must include payment of overtime when the employee works more than 40 hours in a week.

For more detail on the FLSA and higher education, please see here.

3. OVERTIME FINAL RULE AND HIGHER EDUCATION

http://www.dol.gov/whd/overtime/final2016/highered-guidance.pdf

Overtime Final Rule and the Non-Profit Sector


Non-profit Sector: Non-profit work is a complex and important sector in our economy and civil society. The Department recognizes and values the enormous contributions that non-profit organizations make to the country. Many non-profit organizations provide services and programs that benefit vulnerable individuals in a variety of facets of life, including those workers who the Department also works to protect by ensuring that their workplaces are fair, safe, and secure.

Overtime Final Rule: The Department of Labor’s final overtime rule updates the salary level required for the executive, administrative, and professional (“white collar”) exemption to ensure that the Fair Labor Standards Act’s (FLSA) intended overtime protections are fully implemented, and it provides greater clarity for white collar workers and their employers, including non-profit organizations. The final rule will also lead to better work-life balance for many workers, and it can benefit employers by increasing productivity and reducing turnover.

The final rule updates the salary threshold under which most white collar workers are entitled to overtime to equal the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage Census region, currently the South. The final rule raises the salary threshold from $455 a week ($23,660 for a full-year worker) to $913 a week ($47,476 for a full-year worker) effective December 1, 2016.

Non-profits and the FLSA

Neither the FLSA nor the Department’s regulations provide an exemption from overtime requirements for non-profit organizations. While some non-profits may not be covered under the FLSA, it is likely that many employees of non-profits are entitled to FLSA protections.

There are two types of coverage: The FLSA may apply to (1) businesses or similar entities (“enterprise coverage”) or (2) individuals (“individual coverage”). Under enterprise coverage, the FLSA applies to businesses with annual sales or business of at least $500,000. For a non-profit, enterprise coverage applies only to the activities performed for a business purpose (such as operating a gift shop or providing veterinary services for a fee)*; it does not apply to the organization’s charitable activities that are not in substantial competition with other businesses. Income from contributions, membership fees, many dues, and donations (cash or non-cash) used for charitable activities are not counted toward the $500,000 threshold.

*Note: The following types of entities are “named enterprises,” meaning that they are covered by the FLSA regardless of the total of their annual sales or business done or their non-profit status. See WHD Fact Sheet #14 for more information:

• Hospitals• Schools and preschools• Government agencies• Businesses providing medical or nursing care for

residents

Under individual coverage, employees may be entitled to FLSA protections if they themselves are engaged in interstate commerce or in the production of goods for interstate commerce. For example, an individual is covered if the employee makes or receives interstate telephone calls, ships materials to another state, or transports persons or property to another state. This individual coverage applies even if the employee is not engaging in such activities for a business purpose. For example, if an employee regularly calls an out-of-state store and uses a credit card to purchase food for a non-profit that provides free meals for the homeless, that employee is protected by the FLSA on an individual basis, even though the non-profit may not be covered


as an enterprise. The Department, however, will not assert that an employee who on isolated occasions spends an insubstantial amount of time performing such work is individually covered by the FLSA.

In addition, unlike for-profit employers, non-profit organizations may use volunteer services under certain circumstances. Individuals may volunteer time to religious, charitable, civic, humanitarian, or similar non-profit organizations as a public service and not be covered by the FLSA. They may not, however, volunteer time to their own non-profit employer performing the same type of work for which they are employed.

Impact Is Limited by Other Rules and Exemptions: Many employees of non-profit organizations will not be affected by the final rule:

• Hourly workers: The new threshold has no impact on the pay of workers paid hourly. Generally, hourly workers are entitled to overtime regardless of how much they make if they work more than 40 hours. Nothing in the new rule changes that.

• W orkers with regular workweeks of 40 or fewer hours: To the extent that many salaried white collar em-ployees at non-profits have office jobs where they work no more than 40 hours, the changes to the overtime rules will have no effect on their pay.

• W orkers who fail the duties test: Salaried workers who do not primarily perform executive, administrative, or professional duties are not eligible for the white collar overtime exemption and therefore are not affected by the final rule. Those employees already should be getting paid overtime for any hours they work over 40 in one week.

• Highly c ompensated workers: White collar workers who fail the standard duties test but are “highly compensated”—earn more than $134,004 in a year—are almost all ineligible for overtime under the highly compensated employee exemption, which has a minimal duties test. This exemption will cover many high level managers at non-profit organizations. (See more information on HCE duties in WHD Fact Sheet #17H.)

• W orkers (at non-profits that don’t meet the enterprise coverage threshold) who don’t engage in interstate

commerce: As discussed above, employees of non-profits that perform only charitable activities or that make less than $500,000 a year from busi-ness-purpose revenues are only entitled to overtime if they engage in interstate commerce themselves in the course of their job duties.

Non-profit Employers Have Discretion to Choose Between Several Options

Many options are available to employers for complying with the new salary threshold, and the Department does not dictate which options employers must use. Carefully considering these options will be especially important to non-profit organizations for which some or a significant amount of funding comes from government or private grants of set amounts. The Department is working to inform government and private funders of the Overtime Final Rule to encourage consideration of the changes effected by the rule and potential impact on non-profit grantees. These options include:• Raise salaries: For workers whose salaries are close

to the new threshold and who meet the duties test, employers may choose to raise these workers’ salaries to meet the new threshold and maintain their exempt status.

• P ay overtime above a salary: Employers also can continue to pay newly overtime-eligible employees a salary and pay overtime for hours in excess of 40 per week. The law does not require that newly overtime-eligible workers be converted to hourly pay status. This approach works for employees who usually work 40 hours or fewer, but have seasonal or occasional spikes that require overtime for which employers can plan and budget the extra pay during those periods.

o For an employee who works a fixed schedule that rarely varies, the employer may simply keep a record of the schedule and indicate the number of hours the worker actually worked only when the worker varies from the schedule.

o For an employee with a flexible schedule, an employer does not need to require an employee to sign in each time she starts and stops work. The employer must keep an accurate record of the

2. OVERTIME FINAL RULE AND THE NON-PROFIT SECTOR


number of daily hours worked by the employee. So an employer could allow an employee to just provide the total number of hours she worked each day, including the number of overtime hours, by the end of each pay period.

• Evaluate and realign employee workload: Employers can limit the need for employees to work overtime by ensuring that workloads are distributed to minimize overtime and that staffing levels are appropriate for the workload.

• A djust employees’ base pay and pay overtime: Employers can adjust the amount of an employee’s earnings to reallocate it between regular rate of pay and overtime compensation. This method works for employees who work a relatively small amount of predictable overtime. The revised pay may be on a salaried or hourly basis (there is no requirement to convert workers to hourly pay status), but it must include payment of overtime when the employee works more than 40 hours in a week.

For more detail on the FLSA and the non-profit sector, please see here.

3. OVERTIME FINAL RULE AND THE NON-PROFIT SECTOR

http://www.dol.gov/whd/overtime/final2016/nonprofit-guidance.pdf

Overtime for White Collar Workers

Overview and Summary of Final Rule


One of the most basic tenets of our economy is that a hard day’s work should lead to a fair day’s pay. For much of the past century, a cornerstone of that promise has been the idea that you’re paid more if you work more than 40 hours in a week. Today, we are taking action that will make that promise a reality again for more of America’s workers, too many of whom have been left working long hours for no additional pay, taking them away from their families and civic life without any extra compensation.

It wasn’t always this way. The passage of the Fair Labor Standards Act gave most Americans the right to a minimum wage and time-and-a-half pay for more than 40 hours of work in a week. These rules apply to most hourly and salaried workers, but not to some white collar workers whose salaries and duties exempt them from the overtime pay requirement.

The white collar exemption was originally meant for highly-paid workers who had better benefits, job security and opportunities for advancement. Unfortunately, when left unchanged, the salary threshold is eroded by inflation every year. It has only been updated once since the 1970s—in 2004, when it was set too low. As a result, the threshold fails to help employers identify workers who are entitled to overtime pay, and it has left millions without overtime protections to which they should be entitled. This outdated salary threshold provides overtime protections to just 7 percent of full-time salaried workers today based on their pay, compared with 62 percent in 1975. In fact, the white collar exemption salary level set in 2004, $455 per week or $23,660 a year—means even workers earning less than the poverty line for a family of four may earn too much to automatically qualify for overtime.

In March 2014, President Obama directed the Secretary of Labor to update the overtime regulations to reflect

once again the intent of the Fair Labor Standards Act, and to simplify and modernize the rules so they’re easier for workers and businesses to understand and apply. The Department of Labor conducted months of extensive consultations with employers, workers, unions, and other stakeholders to develop the proposed rule, and it carefully reviewed more than 270,000 comments from the public in order to develop the final rule.

Today, President Obama and Secretary Perez announced that the Department of Labor’s final rule will automatically extend overtime pay eligibility to 4.2 million workers. The rule will entitle most salaried white collar workers earning less than $913 a week ($47,476 a year) to overtime pay. This long-awaited update will provide a meaningful boost to workers, and it will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.

The final rule will:

• Put more money into the pockets of many middle class workers—or give them more free time. By increasing the number of workers who are eligible for overtime when they work more than 40 hours in a week, employers will have a choice. They can either increase their employees’ salaries to at least the new salary threshold, pay workers the overtime premium for extra hours, or limit their work to 40 hours in a week.

• Prevent a future erosion of overtime protections and ensure greater predictability. The rule will au-tomatically update the salary threshold every three years based on wage growth over time. This means it will work better in the future by continuing to pro-tect the workers it was meant to protect. Employers will be able to adapt more easily because they will

know when the salary updates will happen and how they will be calculated, and they will be able to esti-mate the amount of the salary update.

• Strengthen overtime protections for salaried workers already entitled to overtime and provide greater clarity for workers and employers. Es-tablishing that white collar workers are not entitled to overtime pay involves clearing two hurdles: (1) assessing whether their salary is above the threshold and (2) applying a “duties test” to ensure that they have the kind of job that Congress meant to exclude from overtime protections. With the new, higher threshold, 8.9 million overtime-eligible salaried workers—and their employers—will be able to determine more easily that they should be receiving overtime pay. Because their salaries are below the new threshold, their employers will no longer have to figure out whether they pass the “duties test,” and they will no longer have to wonder if that test has been applied appropriately. This will simplify application of the rules and provide a bright line that protects the set of workers our workplace laws intended to protect.

• Improve work-life balance. Too many salaried, white collar workers today are overworked, and their employers have no incentive to limit hours because they aren’t required to provide additional pay when employees work more hours. Under this rule, em-ployers will have a renewed monetary incentive to support work-life balance. Many workers will put in fewer hours without seeing a reduction in pay, giv-ing them more time to spend with their families and in their personal pursuits.

• Increase employment by spreading work. The better work-life balance for workers who will now be eligible for overtime protection may create new opportunities for other workers. Some employers will hire additional workers—or give more hours to part-time workers—to cover work currently done during overtime hours.

• Improve workers’ health. Research indicates that working long hours is bad for many workers’ health and increases the risk of injury. Giving workers more down-time can help improve health and prevent injury.

• Increase productivity. The rule will promote improved productivity through workers’ improved morale and reduced turnover.

Summary of the final rule:

• Salary threshold. The final rule will raise the salary level for the first time since 2004. This increase will go into effect on December 1, 2016.

o Standard salary level. The final rule will raise the standard salary threshold to equal the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region, currently the South. This will raise it from $455 a week to $913 a week ($47,476 for a full-year worker). This means that 35 percent of full-time salaried workers will be automatically entitled to overtime, based solely on their salary.

o Highly Compensated Employees (HCE) salary level. The rule also updates the total annual compensation level above which most white collar workers will be ineligible for overtime. The final rule raises this level to the 90th percentile of full-time salaried workers nationally, or from the current $100,000 to $134,004 a year.

• Automatic updates. Every year that the thresh-old remains unchanged, it covers fewer and fewer workers as wages overall increase over time. The Department’s final rule will fix this by automatically updating the salary threshold every three years, be-ginning January 1, 2020. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020. The HCE threshold will increase to the 90th percentile of full-time sal-aried workers nationally, estimated to be $147,524 in 2020. The Department will post new salary levels 150 days in advance of their effective date, begin-ning August 1, 2019.

• Bonuses, incentive payments, and commissions. The final rule will allow up to 10 percent of the salary threshold for non-HCE employees to be met by non-discretionary bonuses, incentive pay, or com-missions, provided these payments are made on at least a quarterly basis. This recognizes the impor-tance these forms of pay have in many companies’ compensation arrangements, particularly for man-agerial employees affected by the final rule. This is a new policy that responds to robust comments re-ceived from the business community on this matter.

2. OVERTIME FOR WHITE COLLAR WORKERS: OVERVIEW AND SUMMARY OF FINAL RULE

• Duties test. The final rule does not make any chang-es to the “duties test” that determines whether white collar salaried workers earning more than the salary threshold are ineligible for overtime pay. But fewer employers and workers will have to worry about its application because the higher salary threshold means more workers’ entitlement to overtime pay will be clear just from their salaries. For workers with salaries above the updated salary level, em-ployers will continue to use the same duties test to determine whether or not the worker is entitled to overtime pay.

Impacts of the rule:

• Workers directly affected. 4.2 million salaried workers will be affected by this rule based on their salaries. These workers are currently ineligible for overtime. The Department estimates that most of them (4.1 million) will become eligible for overtime when they work more than 40 hours (i.e., they will be converted to overtime-eligible status), while others (100,000) will receive a raise so that their salary is above the new threshold.

o Most of these workers will be affected by the standard salary level. However, 65,000 will be affected due to the HCE level alone; of those, 64,000 will become newly eligible for overtime while 1,000 will remain exempt because their employers are expected to raise their salaries above the new HCE threshold.

• Workers indirectly affected. 8.9 million salaried workers (3.2 million blue collar and 5.7 million white collar workers) are currently eligible for overtime be-cause, although their salaries are above the current salary threshold, their duties do not meet the ex-emption for executive, administrative, or profession-

al workers. Under the final rule, their eligibility for overtime will become clearer because their salaries will fall below the new threshold—and no assess-ment of their duties will be necessary. Of the 5.7 million white collar workers, approximately 732,000 are overtime-eligible, but their employers don’t recognize them as such and so do not pay them the overtime they deserve when they work more than 40 hours. This update will give all of these workers the peace of mind in knowing they are properly classified as eligible for overtime.

• More income for working Americans. As a result of this rule, an extra $1.2 billion a year will go into workers’ pockets (those earning between $455 and $913 a week). These benefits will flow to many mid-dle class workers and their families.

o More than half (56 percent) of affected workers are women.

o 61 percent are age 35 or older.

o 82 percent have at least some college, and more than half (53 percent) have a college degree or more.

o In addition, 2.5 million children have at least one parent who will gain overtime protections or get a salary raise.

• More appropriate salary threshold. While the cur-rent threshold ($455) is less than the poverty level for a family of four and just 1.6 times the federal min-imum wage, the new standard salary is much more appropriately set. It will be 3.1 times the federal minimum wage for a full-time worker and twice the poverty level for a family of four.

For more information on the Overtime Final Rule, see www.dol.gov/overtime.

3. OVERTIME FOR WHITE COLLAR WORKERS: OVERVIEW AND SUMMARY OF FINAL RULE

https://www.dol.gov/featured/overtime/

Small Entity Compliance Guideto the Fair Labor Standards Act’s

“White Collar” Exemptions

Wage and Hour Division United States Department of Labor

For more information visit www.dol.gov/whd

>

The Department of Labor provides this general information as a public service. This publication does not carry the force of law or legal opinion. The United States Code, the Federal Register and the Code of Federal Regulations remain the official sources for statutory and regulatory information.

WHD | Small Entity Compliance Guide to the Fair Labor Standards Act’s “White Collar” Exemptions i

1 MINIMUM WAGE AND OVERTIME—THE BASICS

1 EXCEPTIONS TO THE RULE—WHO IS EXEMPT?

2 CLAIMING A WHITE COLLAR EXEMPTION—THE THREE BASIC TESTS

3 THE SALARY BASIS TEST

4 THE SALARY LEVEL TEST

4 Standard salary level

4 Total annual compensation requirement for highly compensated employees

5 Nondiscretionary bonuses and incentive payments

5 Special salary levels for employees in American Samoa or the motion picture industry

6 Automatic updating of the salary and compensation thresholds

6 THE DUTIES TESTS

6 Executive exemption

7 Administrative exemption

7 Professional exemption7 Learned professionals8 Creative professionals8 Teachers

8 Employees practicing law or medicine

8 Outside sales exemption

8 Computer employee exemption

9 Highly compensated employees

9 ADDITIONAL GUIDANCE

CONTENTSSMALL ENTITY COMPLIANCE GUIDE TO THE FAIR LABOR STANDARDS ACT’S “WHITE COLLAR” EXEMPTIONS

WHD | Small Entity Compliance Guide to the Fair Labor Standards Act’s “White Collar” Exemptions 1

MINIMUM WAGE AND OVERTIME – THE BASICS

A basic tenet of working in the United States is that a fair day’s work deserves a fair day’s pay. The Fair Labor Standards Act (FLSA) is the federal labor law that provides basic workplace protections to most workers in the U.S., and guarantees them at least the federal minimum wage for every hour they work, and overtime, at one and a half times their regular rates of pay, for hours they work beyond 40 in a workweek. The FLSA is enforced by the U.S. Department of Labor’s Wage and Hour Division, and covers more than 135 million workers at more than 7.3 million establishments nationwide.

The FLSA does not provide an exemption from these requirements specifically for small businesses. Generally, the FLSA applies to employees of enterprises that have an annual gross volume of sales made or business done totaling $500,000 or more, and to employees individually covered by the law because they are engaged in interstate commerce or in the production of goods for commerce. In addition, employees of certain entities are covered by the FLSA regardless of the amount of gross volume of sales or business done. These entities include: hospitals; businesses providing medical or nursing care for residents; schools (whether operated for profit or not-for-profit); and public agencies. The FLSA creates a level playing field for businesses nationwide by setting a floor on wages and a premium for excess work; individual cities and states, however, may have stronger wage and hour protections than the minimum federal standards established under the FLSA. If a state or city establishes a more protective standard than the provisions of the FLSA, the higher standard applies in that state or city.

EXCEPTIONS TO THE RULE – WHO IS EXEMPT?

As a general matter, coverage under the FLSA is broadly construed to ensure that the law provides employees with wage and hour protections, as Congress intended. The FLSA does, however, allow employers to claim exemptions from those requirements for certain employees whose jobs meet specific criteria.

Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime requirements for employees employed as bona fide executive, administrative, professional, and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain employees in computer-related occupations. These exemptions are sometimes referred to collectively as the “white collar” exemptions, and are defined in the Department’s regulations located at 29 CFR Part 541.

To qualify for one of these exemptions, employees generally must meet certain tests regarding their job duties and be paid a certain minimum salary. Job titles alone do not determine exempt status, and neither does the receipt of a particular salary. In order for an exemption to apply, an employee’s specific job duties and earnings must meet all of the applicable requirements. It is important to note that simply paying an employee a salary does not relieve an employer of minimum wage and overtime obligations to that employee. Unless they meet the criteria of a specific exemption, employees covered by FLSA protections who are paid a salary are still due overtime if they work more than 40 hours in a week. To be clear, millions of salaried white collar employees do not qualify for any of the so-called “white collar” exemptions because their duties or earnings do not meet the requirements. These employees therefore remain entitled to both minimum wage and overtime pay.

2 WHD | Small Entity Compliance Guide to the Fair Labor Standards Act’s “White Collar” Exemptions

This guide provides an overview of each of the white collar exemptions, and describes the basic tests and requirements to qualify for each. If you have specific questions about any of these exemptions, please contact the Wage and Hour Division (WHD) at 866-4US-WAGE for assistance, or visit us online at www.dol.gov/whd.

CLAIMING A WHITE COLLAR EXEMPTION - THE THREE BASIC TESTS

For an employer to claim a white collar exemption for a particular employee, three tests generally need to be satisfied:

1. Payment on a salary basis: the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed;

2. Payment of a minimum salary level: the amount of salary paid must meet a specified minimum amount; and

3. Duties test: the employee’s job duties must primarily involve those associated with exempt executive, administrative, professional, outside sales, or computer employees.

Basic Requirements for Exemption:

Exemption Salary Level Test Salary Basis Test Duties Test

Executive • At least $913 / week ($47,476 / year)

• At least 90% of the salary level ($822 / week) must be paid on a “salary” basis

• Up to 10% ($91 / week) may be satisfied with nondiscretionary bonuses or incentive payments

• The employee’s “primary duty” must be that of an exempt executive employee, as described in the “Duties Tests” section of this guide

Administrative • At least $913 / week ($47,476 / year)

• “Academic administrative personnel” may qualify with a salary at least equal to the entry salary for teachers at their educational establishment.

• At least 90% of the salary level ($822 / week) must be paid on a “salary” or “fee” basis

• Up to 10% of the salary level ($91 / week) may be satisfied with nondiscretionary bonuses or incentive payments

• The employee’s “primary duty” must be that of an exempt administrative employee, as described in the “Duties Tests” section of this guide

Professional • At least $913 / week ($47,476 / year)

Salary level test does not apply to doctors, lawyers, or teachers

• At least 90% of the salary level ($822 / week) must be paid on a “salary” or “fee” basis


These requirements do not apply for doctors, lawyers, and teachers

• The employee’s “primary duty” must be that of an exempt professional employee, as described in the “Duties Tests” section of this guide

Outside Sales Does not apply Does not apply • The employee’s “primary duty” must be that of an exempt outside sales employee, as described in the “Duties Tests” section of this guide


Computer • At least $913 / week ($47,476 / year), or at least $27.63 / hour

• At least 90% of the salary level ($822 / week) must be paid on a “salary” or “fee” basis unless the employee is paid on an hourly basis and receives at least $27.63 / hour


• The employee’s “primary duty” must be that of an exempt computer employee, as described in the “Duties Tests” section of this guide

A more relaxed duties test applies to highly compensated employees earning at least $134,004 per year, as discussed below.

THE SALARY BASIS TEST

Generally, for an employer to claim a white collar exemption from minimum wage and overtime for an employee, that employee must be paid on a salary basis.

Being paid on a “salary basis” means an employee regularly receives a predetermined amount of money each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Generally, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. In this Final Rule, for the first time employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, provided these payments are made on a quarterly or more frequent basis. Prior to this Final Rule, the Department required the entire salary level to be paid in each work week.

Deductions from pay are permissible only:

• when an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability;

• when an exempt employee is absent from work for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing paid sick leave;

• to offset amounts employees receive as jury or witness fees, or for military pay;

• for penalties imposed in good faith for infractions of safety rules of major significance; or

• for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.

See 29 CFR 541.602.

An employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. If the employer makes improper deductions from an employee’s predetermined salary, that employee is not paid on a “salary basis.” If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.


The salary basis test does not apply to outside sales employees, teachers, and employees practicing law or medicine.

“Fee Basis”

Administrative, professional, and computer employees may be paid on a “fee basis” rather than on a salary basis. If the employee is paid an agreed sum for a single job, regardless of the time required for its completion, the employee will be considered to be paid on a “fee basis.” A fee payment is generally paid for a unique job, rather than for a series of jobs repeated a number of times and for which identical payments repeatedly are made. To determine whether the fee payment meets the minimum salary level requirement, the test is to consider the time worked on the job and determine whether the payment is at a rate that would amount to at least $913 per week if the employee worked 40 hours. For example, an artist paid $500 for a picture that took 20 hours to complete meets the minimum salary requirement since the rate would result in $1,000 if 40 hours were worked.

THE SALARY LEVEL TEST

Standard salary level

Generally, an employee must be paid at least $913 per week to qualify for one of the white collar exemptions. Exempt computer employees may be paid at least $913 per week, or on an hourly basis of at least $27.63 an hour.

Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level amount (up to $91 of the $913 per week threshold). Such payments must be paid on a quarterly or more frequent basis to count towards the salary level test. If an employee does not earn enough of a nondiscretionary bonus or incentive payment in a given quarter to meet the standard salary level, an employer may make a “catch-up” payment no later than the next pay period after the end of the quarter. Any such “catch-up” payment counts only toward the prior quarter’s salary. This is an exception to the salary basis test and appears in that regulatory provision.

The salary level test does not apply to outside sales employees, teachers, and employees practicing law or medicine. Academic administrative employees may qualify for exemption either by satisfying the standard salary level test or, alternatively, being paid on a salary basis at a rate at least equal to the entrance salary for teachers in the educational establishment at which the employee is employed.

Total annual compensation requirement for highly compensated employees

Employees who receive total annual compensation of at least $134,004, referred to as “highly compensated employees” (HCEs), are exempt from the minimum wage and overtime requirements of the FLSA if they meet a more relaxed duties test than is required for employees paid the standard salary level. HCEs are exempt if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the “Duties Tests” section of this guide. Nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the $134,004 HCE total annual compensation requirement, but the employer must pay at least the full standard salary level of $913 per week on a salary or fee basis to qualify for this exemption. If an employee’s


total compensation in a given annual period fails to meet the $134,004 threshold, an employer may make a “catch-up” payment within one month of the end of the annual period. Any such catch-up payment counts only toward the prior year’s total annual compensation. If such a catch-up payment is not made within the timeframe allotted, the exemption is lost for the prior quarter and the overtime premium must be paid.

Basic Requirements for the Exemption of HCEs

Total Annual Compensation Requirement

Salary Basis Test Duties Test

• $134,004 per year in total compensation, including payment of at least $913 / week

• 100% of the standard salary level ($913 / week) must be paid on a “salary” or “fee” basis

• The remainder of the HCE total annual compensation requirement may be paid in nondiscretionary bonuses or incentive payments (including commissions)

• The employee’s “primary duty” must be office or non-manual work

• Must “customarily and regularly” perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee, as described in the “Duties Tests” section of this guide

Nondiscretionary bonuses and incentive payments

Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. For employers to credit these payments toward the salary level test, they must be paid on a quarterly or more frequent basis.

Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. Examples include individual or group production bonuses, and bonuses for quality and accuracy of work. Incentive payments, including commissions, are also considered non-discretionary as such payments are generally based on a prior contract or understanding, and employees generally have a contract right to the commission promised.

By contrast, discretionary bonuses are generally paid without prior contract, promise, or announcement, and the decision to provide the bonus and the payment amount is at the employer’s sole discretion. An example would be an “on-the-spot” award made without announcement and at the employer’s sole discretion (e.g., an unannounced year-end bonus). Discretionary bonuses cannot be used to satisfy the salary level requirement.

If an employee does not earn enough of a nondiscretionary bonus or incentive payment in a given quarter to retain his or her exempt status, the Department permits the employer to make a “catch-up” payment no later than the next pay period after the end of the quarter. If such a catch-up payment is not made within the timeframe allotted, the exemption is lost for the prior quarter and the overtime premium must be paid.

Special salary levels for employees in American Samoa or the motion picture industry

The regulations provide a lower special salary level requirement for American Samoa. The special salary level test for employees in American Samoa is 84 percent of the standard salary level, $767 per week.


The regulations also establish a special “base rate” threshold for employees in the motion picture industry. The base rate is $1,397 per week, or a prorated amount based on the number of days worked.

Automatic updating of the salary and compensation thresholds

To prevent the salary levels from becoming outdated, they will be updated automatically every three years. The Department of Labor will publish a notice with the new updated thresholds in the Federal Register at least 150 days before those updated amounts take effect. The first update will take effect on January 1, 2020; future automatic updates will take effect on January 1 of 2023, 2026, etc.

THE DUTIES TESTS

To qualify for any of the white collar exemptions, employees must meet certain tests regarding their job duties. The regulations establish separate duties requirements for executive, administrative, professional, outside sales, and computer employees, respectively.

Under the standard duties test, an employee’s primary duty must be that of an exempt executive, administrative or professional employee. “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.

Employees can also qualify for exemption under the special rule for highly compensated employees, which pairs a more relaxed duties test with the higher HCE total annual compensation requirement. Under the HCE duties test, the employee’s primary duty must still consist of office or non-manual work, but the employee need only “customarily and regularly” perform one of the exempt duties of a bona fide executive, administrative, or professional employee, as described in the regulations. The duties requirements for each of the white collar exemptions are described below in greater detail.

Executive exemption

To qualify for the executive employee exemption under the standard test, all of the following job duties requirements must be satisfied:

• The employee’s primary duty must be managing the enterprise in which the employee is employed, or managing a customarily recognized department or subdivision of the enterprise;

• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent (for example, one full-time and two half-time employees are equivalent to two full-time employees); and

• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.


Administrative exemption

To qualify for the administrative employee exemption under the standard test, all of the following duties requirements must be satisfied:

• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

• The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Academic administrative personnel whose primary duty is performing administrative functions directly related to academic instruction or training in an educational institution, such as principals and vice-principals responsible for the operation of an elementary or secondary school, department heads at institutions of higher education, academic counselors who perform work such as administering school testing programs, assisting students with academic problems, and advising students concerning degree requirements, and others with similar responsibilities, are eligible for a special alternative salary level that does not apply to white collar employees outside of an educational institution. These academic administrative personnel are exempt from the FLSA’s minimum wage and overtime requirements if they are paid at least as much as the entrance salary for teachers at their educational establishment.

Professional exemption

Several different kinds of “professional” employees may qualify for the professional employee exemption. These include “learned professionals,” “creative professionals,” teachers, and employees practicing law or medicine.

Learned professionals

To qualify as a “learned professional” under the standard test, all of the following duties requirements must be satisfied:

• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

• The advanced knowledge must be in a field of science or learning, including law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical, and biological sciences, pharmacy, and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning; and

• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction, which means specialized academic training is a standard prerequisite for entry into the profession.


Creative professionals

To qualify for the creative professional employee exemption under the standard test, the employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. This includes such fields as music, writing, acting, and the graphic arts.

Teachers

Teachers are 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.

Employees practicing law or medicine

An employee holding a valid license or certificate permitting the practice of law or medicine is exempt if the employee is actually engaged in such a practice. An employee who holds an academic degree for the general practice of medicine is also exempt if the employee is engaged in an internship or resident program for the profession.

Outside sales exemption

To qualify for the outside sales employee exemption, all of the following duties requirements must be satisfied:

• The employee’s primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. “Sales” includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition. It includes the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property; and

• The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Computer employee exemption

To qualify for the computer employee exemption, the following duties requirements must be satisfied:

• The employee must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field; and

• The employee’s primary duty must consist of:

1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;


2. The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

4. A combination of the aforementioned duties, the performance of which requires the same level of skills.

Highly compensated employees

An employee with a primary duty of office or non-manual work who meets the HCE compensation requirements is exempt if the employee customarily and regularly performs at least one of the exempt duties of a bona fide executive, administrative, or professional employee, as described in the regulations. An employee who performs such exempt duties on an isolated or occasional basis will not satisfy this minimal duties requirement.

ADDITIONAL GUIDANCE

The Department has issued additional compliance assistance materials to help employers, including small entities, understand the changes to the “white collar” exemption regulations. This includes detailed guidance for specific sectors, including higher education and non-profit organizations. These materials are available at: www.dol.gov/whd

http://www.dol.gov/whd


Wage and Hour Division United States Department of Labor

1-886-487-9243 www.dol.gov/whd

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