DOL Final Rule – Overtime and Exempt Status
The Department of Labor released its Final Rule regarding overtime and exempt status for executive, administrative, and professional employees. As a result, effective December 1, 2016, the credit union can no longer consider employees making less than $47,476 annually as exempt from overtime pay.
Credit Union Action Required
Effective December 1, 2016, the credit union can no longer consider employees making less than $47,476 annually as exempt from overtime pay.
Credit unions have a range of options for responding to the updated standard salary level. For each affected employee newly entitled to overtime pay, the credit union may:
- increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
- pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked;
- reduce or eliminate overtime hours;
- reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
- use some combination of these responses.
The circumstances of each affected employee will likely impact how the credit union respond to this Final Rule. For example, the credit union may be more likely to give raises to employees who regularly work overtime and earn slightly below the new standard salary level, in order to maintain their overtime-exempt status so that the employer does not have to pay the overtime premium. For employees who rarely or almost never work overtime hours, the credit union may simply choose to pay the overtime premium whenever necessary.
Nothing in the rule requires the credit union to change employees’ pay to hourly from salaried, even if the employees’ classification changes from exempt to overtime eligible. The credit union may choose options #2-#4 above while continuing to pay newly overtime eligible employees on a salaried basis.
The Department’s regulations have generally required each of three tests to be met for the Fair Labor Standards Act’s (FSLA) Executive, Administrative, and Professional (EAP) exemption to apply:
- 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”);
- the amount of salary paid must meet a minimum specified amount (“salary level test”); and
- the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).
This Final Rule more than doubles the salary level test threshold; from $23,660 to $47,476 annually ($913 weekly). The Rule also allows employers to use nondiscretionary incentive compensation to meet up to ten percent of the new threshold. The threshold amount will be adjusted every three years.
Nondiscretionary incentives are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. These can be production goals, retention bonuses, and commission payments based on a fixed formula. Discretionary incentives are when the decision to award bonuses or payments is at the credit union’s sole discretion and not in accordance with any preannounced standards, and are not included in the computation of the threshold requirement. These can be unannounced bonuses or spontaneous rewards for specific acts.
The requirements for the “duties test” have not changed. Essentially, the duties test consists of two major components:
- The employee’s primary job duty must be to act as a “bona fide” executive, administrative or professional employee. (See the exemptions to overtime below for more details.)
- The employee must also have the ability to exercise independent judgment and discretion when making decisions.
Unless covered by an exemption, employees covered by the FSLA must receive overtime pay for all hours worked over 40 in a workweek at a rate not less than one and one-half times their regular rate of pay. Credit unions cannot satisfy their overtime obligations by providing comp time and must pay overtime-eligible employees an overtime premium for hours over 40 in a workweek.
Executive Exemption
To qualify for the executive employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $913 per week;
- The employee’s primary duty must be managing the enterprise, 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; 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 Exemptions
To qualify for the administrative employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week;
- 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 includes the exercise of discretion and independent judgment with respect to matters of significance.
Professional Exemption
To qualify for the learned professional employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $913 per week;
- 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; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Independent Judgement and Discretion
As a practical matter, this means the employee must not be subject to close supervision or control. If the employee’s decision making authority is subject to close review or approval by supervisors, then the “duties test” is probably not met.