The Ever-Changing Laws About Exempt Employees | FFS Insights

by Teresa R. Tracy

THE NEW FLSA RULE ON EXEMPT STATUS: WHAT CALIFORNIA EMPLOYERS NEED TO KNOW

Effective January 1, 2020, a new rule will become effective under the federal Fair Labor Standards Act (FLSA), revising the exemptions for executive, administrative, professional, outside sales, and computer employees. It is estimated that 1.2 million currently exempt employees who earn at least $55 per week but less than the standard federal salary level of $684 per week will, without some intervening action by their employers, gain overtime eligibility; that an additional 2.2 million white collar employees who are currently nonexempt because they do not satisfy the duties requirements for exempt status and currently earn within the above range will have their overtime-eligible status strengthened because they will now fail both the salary level and duties tests; and an estimated 101,800 employees who are currently exempt under the highly compensated employee test will be affected by the increase in the total annual compensation level for this exemption.

Highlights of Final Rule:

1. It does not change the duties tests for exempt status under any of the exemptions.
2. It does not change the overtime trigger under the FLSA, i.e., hours worked over 40 in a workweek.
3. It does not change the requirement that exempt employees under the executive, administrative, or professional exemptions be paid on a salary basis unless a fee or hourly basis is currently permitted for a specific exemption. Exempt computer employees may be paid at least $684 per week, or on an hourly basis of at least $27.63 an hour. The salary level test does not apply to outside sales employees, teachers, and employees practicing law or medicine.
4. It does set a new standard salary level of $684 per week for most exempt employees – equivalent to $35,568 per year for a full-year employee, with certain special salary levels for defined groups ($455 per week for Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands; $380 per week for American Samoa; a weekly “base rate” of $1,043 per week for the motion picture producing industry). 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 by which the employee is employed.
5. It does allow nondiscretionary bonuses and incentive payments (e.g., commissions, include individual or group production bonuses, and bonuses for quality and accuracy of work) paid on an annual or more frequent basis to be used to satisfy up to 10 percent of the above salary levels. Discretionary payments cannot be used to satisfy any part of the salary level requirement. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, the employer can make a “catch-up” payment at the end of the 52-week period. The employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 52-week period). The employer may use any 52-week period, such as a calendar year, a fiscal year, or an anniversary of the hire year. If, by the end of the 52-week period, the sum of the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the required salary level for the 52-week period ($35,568 for the standard salary level for a full-year worker), the employer may make a “catch-up” payment to achieve the required level within one pay period of the end of the 52-week period. Any such “catch-up” payment counts only toward the prior year’s salary, not toward the salary amount during the 52-week period in which it was paid. If such a catch-up payment is not made within the timeframe allotted, the exemption is lost and the employee would be entitled to overtime pay for any overtime hours worked during the previous 52-week period. Thus, for the standard salary level, employers may use such payments to satisfy up to $68 of the $684 per week threshold, but must still pay at least $616 per week on a salary basis.
6. It does set the highly compensated employee annual compensation level at $107,432. To claim this exemption under the final rule, employers must pay workers at least the standard weekly salary level of $684 per week on a salary or fee basis, while the remainder of the total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation. If an employee’s total compensation in a given annual period fails to meet the $107,432 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 and overtime premium pay must be paid in any week the employee worked more than 40 hours. As noted above, employees who are exempt under the highly compensated employee test must receive at least the standard salary amount ($684 per week) on a salary or fee basis. The highly compensated employee test does not permit any portion of this amount to be satisfied by nondiscretionary bonuses or incentive payments. Thus, highly compensated employees must receive the full standard salary amount each week on a salary or fee basis.

What It Means for California Employees:

Employers who have employees in California should be aware that nothing in the FLSA final rule changes California law and regulations. As always, an employer must comply with the most stringent component of any law or regulation in order to be in complete compliance. California law and regulations are typically more stringent than federal ones.

Here are major differences between the two laws and regulations regarding exempt status:

1. Duties Test. Unlike the FLSA, California requires exempt employees to perform exempt duties for more than 50 percent of their working hours in any given workweek. Furthermore, the kind of related duties that count toward this threshold are more limited than under the FLSA. Furthermore, the list of state licensed professionals is narrower than what may be treated as exempt under the FLSA professional exemption. Thus, a California employee would have to meet the duties requirements of both sets of laws and regulations in order to be fully exempt from overtime.
2. No Fee Alternative. There is no fee alternative for any exemption under California law. All of the white collar exemptions require the payment of a salary, except that computer professionals may be paid on an hourly basis as long as the hourly rate meets the minimum for this exemption.
3. Higher Minimum Salary. The state salary minimum for exempt status is set at twice the state minimum wage for a full-time employee. Nondiscretionary bonuses and other incentives cannot be used to meet the salary minimum. Furthermore, effective January 1, 2020 (when the new FLSA rule becomes effective) the minimum annual salary for exempt status in California will be $49,920 for employers with 25 employees or less ($12 x 2 x 40 x 52), and $54,080 for employers with 26 or more employees ($13 x 2 x 40 x 52). Since state minimum salary thresholds are higher than the FLSA’s, an employer must pay the higher state minimum salary in order to retain exempt status.
4. Neither Nondiscretionary Nor Discretionary Payments Count. Under state law, there is no ability to credit either nondiscretionary or discretionary incentive payments toward the minimum salary amount.
5. No Highly Compensated Employee Exemption. There is no exemption that is specific to highly compensated employees; they must meet all of the requirements for exempt status.
6. No Special Salary Levels. There is no difference between the salary level required for exempt status with respect to teachers, employees practicing law or medicine, or academic administrative employees.
7. More Overtime Triggers. State overtime has a number of different triggers if the employee is nonexempt because the employee fails the state salary requirement, duties requirement, or both.
8. Remember to Check Local Requirements. The local laws currently being adopted address minimum wage rates for affected employees, but do not affect the salary requirements for exempt status under state, or federal laws. This may change as local legislative bodies re-examine their local requirements.

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This article is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this article does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.