What You Need to Know About the Fair Labor Standards Act

Earlier this year the U.S. Department of Labor announced a new ruling in overtime laws called the Fair Labor Standards Act (FLSA). The Act updates overtime rules to be consistent with today’s economic climate. Today, a professional exempt employee paid a $40,000 salary while working a steady 60 hours a week earns less than the minimum wage when pay is broken down hourly.

The new FLSA, which goes into effect on December 1, 2016, defines three provisions designed to protect an estimated 4.2 million employees from under-payment.

Provision 1: Increased Requirements for Executive, Administrative and Professional Employees

The minimum salary and compensation level required for the three full-time exemption classes – executive, administrative and professional (EAP) – has more than doubled from the current $23,600. The new threshold is set to match the 40th percentile of weekly wages for the lowest earning Census Region at $47,476.

Provision 2: Increased Threshold for Highly Compensated Employees

The new total annual compensation requirement for highly compensated employees (HCE) is set to match the 90th percentile of income, increasing from today’s $100,000 to the new $134,004.

Provision 3: Three-Year Compensation Requirement Updates

Steve BroussardThe third provision “establishes a mechanism for automatically updating the salary and compensation levels every three years [beginning January 1, 2020] to maintain the levels at the [40th and 90th] percentiles,” says Steve Broussard, Shareholder at Hall Estill. This ensures that they continue to provide useful and effective tests for exemption, according to the Department of Labor.

Individual Coverage Test

interstate commerceA company must do at least $500,000 in business to be covered under FLSA. However,
even if a company is not covered, the Individual Coverage Test must be applied to employees conducting interstate commerce.

“Look at what that individual does, examine the job duties,” says Broussard.Are they on the telephone making long distance calls? Are they traveling across state lines? All of those activities are considered to be interstate commerce. So those particular individuals may be covered by the Act.”

Maintaining Compliance

Employers have a few options to maintain compliance when the new rules take effect in December. The first is to increase the salary of exempt employees to satisfy the new thresholds. Alternatively, employers might consider converting employees from salary to hourly wages if their duties don’t match the so called “white collar” exemptions’ definitions. Employers can reallocate workload so each employee can complete weekly duties within 40 hours.

It’s worth noting employers can use non-discretionary bonuses and incentive payments to satisfy up to 10 percent of the Executive, Administrative and Professional  standard salary levels.

If employees are not classified correctly according to FSLA, employers can be subjected to liability from the federal government, Department of Labor and individuals. Broussard warns of the substantial financial hit companies will incur for non-compliance, including legal fees, compensation for back wages and penalties.

Broussard recommends suppliers visit the Department of Labor’s website to become familiar with the changes going into effect on December 1. Suppliers might also want to meet with a lawyer or an accountant to determine how to best enact changes to comply with the new law.

You can also watch Steve Broussard’s interview with Neile Jones on this episode of Focus on Suppliers: