UPDATE, NOVEMBER 22, 2016

On Tuesday, November 22, 2016, a federal judge blocked implementation of the Obama Administration rule increasing the salary threshold for avoiding overtime from pay of $455/week to pay of $913/week.  With the transition in administrations currently in process, the future of this rule is clearly in doubt.  Stayed tuned and we will advise you of changes as they become known.

Below is our original communication on implementation of the overtime rule.  Note that we have made one significant edit.  In the original communication, we outlined an exception to FSLA granted by the US Department of Labor for certain small businesses, nonprofits, and their employees.  What we also needed to highlight is that North Carolina is one of a few states that has adopted legislation that disregards the small business exceptions.  Thus all employees and employers in North Carolina (including small businesses and nonprofits) are subject to the requirements of FSLA.

Original Communication:

Many of you, no doubt, have heard of the new overtime rules that are about to go into effect for employers and employees. New regulations issued by the US Department of Labor concerning employers’ obligations to pay overtime will take effect on December 1, 2016.  These new regulations, which update the Fair Labor Standards Act (FLSA), will impact many businesses, especially those in the retail, restaurant, and manufacturing industries.  The summary below will help you understand how these new rules might impact you or your business.

The FLSA was part of the “New Deal” laws implemented in 1938 during the Roosevelt administration.  The two most prominent components of the FLSA are the overtime rules and the minimum wage rules.  With respect to overtime, the rules require that a business pay overtime to employees who work more than 40 hours during any week unless the business or the employee qualify for an exemption to the rules.  For all overtime hours worked in an applicable week, the employee must be paid at a rate of 1.5x their normal pay rate .

There is an exemption from the overtime rules known as the “white collar” exemption.  If an employee meets both the “Duties Test” and the “Salary Test”, he or she is exempt from being paid overtime.  The Duties test is met if the primary duty of an employee is the performance of executive, administrative or professional tasks.  The Salary test requires that an employee be paid a salary, which means he or she is paid a predetermined amount not impacted by variations in the quality or quantity of the employee’s work.  The Salary test requires that the regular salary be at least equal to a set minimum amount.  It is this latter requirement that is the subject of the new rules.  Before December 1, the minimum salary to be exempt from the overtime rules was only $455 per week, or $23,660 per year.  Beginning December 1, that amount will rise to $913 per week, or $47,476 on an annual basis.  While many point out that the salary threshold has not been adjusted over the years to account for inflation, such a substantial change now will have an impact on many businesses.

If an employee was not formerly subject to the overtime rules, but will be now, the employer must make one of these changes by December 1:

• Begin paying overtime rate for hours worked over 40 per week.
• Increase the annual salary rate to over $47,476 per year.
• Adjust compensation to a new agreed upon rate taking into consideration the new overtime pay requirements.
• Take steps to reduce the potential for overtime by adjusting employee schedules, expectations, requirements, and responsibilities.

There are many nuances to these rules beyond the scope of this blog.  For instance, there are rules that say to what extent bonuses are considered in meeting the $47,476 threshold.  In addition, there are several notable exceptions to FLSA.

• Businesses with annual revenue of less than $500,000 are not subject to FLSA, unless they are hospitals, businesses providing medical or nursing care for residents, schools and preschools, or government agencies.
• Businesses with less than two employees.
• While there is no specific exemption for non-profits, the $500,000 annual revenue rule described above does apply. In measuring annual revenue, only business revenues are considered.  Revenue from the organization’s charitable activities that are not in substantial competition with other businesses is not considered in determining whether the $500,000 threshold is reached.

Very importantly, even if the business is exempt from FLSA under the above rule, certain employees may still be covered.  Any employee engaged in interstate commerce is covered by FLSA.  Department of Labor guidance creates broad coverage in this category, offering the following examples of employees who are considered to be engaged in interstate commerce:

• Factory worker assembling goods to be sent out of state.
• Office worker who regularly makes telephone calls to persons located in other states.
• A person who performs janitorial work in a building where goods are produced for shipment outside the State.

This post provides just an overview of these rule changes.  Please contact our office if you need assistance in determining how this change applies to your business. You may also want to refer to the US Department of Labor Questions and Answers webpage for additional information.

David Piscorik