Practical Implications of the FLSA’s Final Overtime Rule
In this episode, we discuss the impact of the Final Overtime Rule, which impacts the minimum salary threshold for exempt employees under federal wage and hour law.
As a shareholder with the firm, Dana Stutzman counsels a diverse group of employers and health care clients in numerous aspects of employment and labor law, health care regulatory matters and issues specific to the behavioral health industry. He is a trusted advisor and confidant. He advises management and health care clients on a wide variety of regulatory issues, from discipline and discharge matters to privacy, professional staff and physician contracting matters.
Mary Kate Liffrig
Mary Kate Liffrig focuses her practice in the area of labor and employment law, with an emphasis on counseling employers through all areas of the employment relationship. She counsels clients on a wide variety of employment law issues, such as hiring and disciplinary matters, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Family Medical Leave Act, wage and hour issues, handbook and policy review/creation and employment contract drafting and negotiations.
Dana Stutzman: Welcome to Hall Render’s HR Insights for Healthcare podcasts covering labor and employment law cases and trends for professionals working in the healthcare industry. My name is Dana Stutzman, and I am an attorney with Hall Render, the largest healthcare focused law firm in the country. I’m here today with my colleague, Mary Kate Liffrig. Mary Kate and I both practice employment law and regularly advise healthcare clients in a variety of labor and employment law topics. Please remember that the views expressed in this podcast are those of the participants only and do not constitute legal advice.
Today we’re going to talk about a topic both near and dear to my heart, the federal Fair Labor Standards Act which many of you in the biz know is a federal wage and hour law commonly referred to as the FLSA. Let’s get down to brass tax. The US Department of Labor issued a final rule in the fall of 2019 that went into effect on January 1st. Let’s just start with a couple of general questions about the FLSA generally and then more specifically about this final rule.
Mary Kate, can you give us just a few of the basics about what the final rule is and what it requires? Please.
Mary Kate Liffrig: Absolutely. In September of 2019, the Department of Labor issued a final rule increasing the salary thresholds under the FLSA for exempt employees.
Stutzman: Perfect. That’s a wrap. That’s all we have time for … No, I’m kidding. I’m kidding. All right. Let’s drill down on this just a little bit more. Can you just give a bit of a primer on federal wage and hour law as background?
Liffrig: Yeah. Very generally speaking, the federal Fair Labor Standards Act governs minimum wage and overtime. So covered nonexempt employees are entitled to minimum wage of $7.25 per hour and are entitled to overtime at time and a half for hours worked over 40 in a work week. Quick disclaimer, many states have enacted their own wage and hour laws that could be more favorable to employees than the Fair Labor Standards Act. So certainly employers should be aware of the laws applicable to them.
Sticking just with federal law, the FLSA really only requires that employees receive minimum wage and overtime guarantees, but certain employees can be exempt from these requirements. When we refer to exempt employees, that’s who we’re referring to. In order to be exempt, from these minimum wage and overtime requirements, they have to meet very specific exemptions that are outlined in the regulations.
Stutzman: Okay. Can you give us just a few examples of these exemptions that you’ve referred to? Again, we’re talking federal law, FLSA. Can you provide us just a couple of exemptions by way of example?
Liffrig: Yeah, so the most common that we see in the healthcare industry are probably the executive, administrative, and professional exemptions. Then somewhat less frequently, but still with some regularity, the highly compensated employee exemption, and these exemptions have both a salary basis component, that is in order to be considered exempt the employee has to be paid on a salary basis at a minimum threshold set by the Department of Labor, and they all also have a duties component. They have to perform certain exempt work.
Stutzman: Okay, so that’s helpful. As I kind of think about it in my mind’s eye, Fair Labor Standards Act, two basic types of workers. You have on the one hand nonexempt employees, and then on the other you have exempt employees. Nonexempt employees are commonly, although technically it’s not accurate, but commonly referred to as hourly workers, hourly folks, and exempt workers are commonly, again technically it’s not accurate, but they’re referred to as salaried workers.
Because we want to be precise, we’re going to use the technical terms exempt and nonexempt. Nonexempt employees have to get paid at least minimum wage, and they’re entitled to certain overtime guarantees. Is that right?
Liffrig: Yep, you got it.
Stutzman: Okay. Then, on the other hand, you’ve got exempt employees who are exempt from minimum wage and overtime requirements. If I am an exempt employee and I work 55 hours in a work week, I should not be paid and I shouldn’t anticipate getting paid overtime for those 15 hours that I’ve worked over 40. Again, do I have that right, and am I thinking of this in the right way?
Liffrig: Yep, you sure are. So we’re talking about, just as you said, who is exempt from minimum wages and the overtime requirements that you just succinctly explained.
Stutzman: When we look at the boxes that have to be checked in order to be exempt, basically you have two things to be an exempt employee under the FLSA. First, you have to be doing exempt duties meaning the type of day to day activities that you carry out in your job have to be considered exempt duties, and there’s a bunch of regulations that talk about that.
Then also there is a pay threshold, a salary threshold, that also has to be satisfied in order to be considered exempt. Is that right?
Liffrig: Mm-hmm (affirmative).
Stutzman: And as you pointed out earlier, this is we’re only talking right now today about the federal side of the house. We’re not talking about state laws. So this is just a federal thing, is that right?
Liffrig: Yep. Many states have adopted laws that set higher minimums wages or set different requirements for exemptions, and so employers just need to be able to comply with both state and federal law in those instances, and certainly, we’re not going to get into that nuance here. We’re just talking FLSA.
Stutzman: Let’s go back and drill more specifically into this final rule, how it comes into play. I think you said that the final rule increased the salary threshold under the FLSA for certain exempt employees. Can you walk me through what that means exactly?
Liffrig: The new rule says that in order to be considered exempt from overtime, employers have to pay their professional, executive, administrative, and salaried computer employees a minimum of $684 per week or the equivalent of $35,568 annually. That’s up from the prior minimum salary of $455 a week or $23,660 annually. Employers are allowed to meet 10% of these salary minimums with nondiscretionary bonus payments and incentive payments.
Then the other change that the final rule makes is increasing the minimum salary requirements for this special class of exempt employees that we call highly compensated employees or HCEs. Previously the minimum salary requirement for HCEs was $100,000 annually, and that’s up to $107,432.
Stutzman: Let me jump in again because there’s a lot of numbers and there’s a lot of data there. Let’s try and maybe simplify it out a bit. Let’s just use one exemption as an example. It doesn’t matter. It can be executive or administrative, whatever. We have exempt duties, and what we’re talking about is the pay component, and it sounds like the new rule increased the salary up to $684 per week which is equivalent to $35,568 on an annual basis. Is that right? Do I have that straight in my head?
Liffrig: Yep, that’s exactly it. Just again to drill down on the details here, if we’re looking at the executive employee exemption just an example, if you’re going to be exempt under the executive employee exemption there’s that salary basis test that we’re talking about, the $684 a week, and then there are the specific duty requirements. The executive exemption, duty requirements, are the employee’s primary duty has to be managing the enterprise or a customarily recognized department of the enterprise. The employee has to regularly direct the work of at least two or more employees, and the employee has to have the authority to hire, fire, or make their suggestions or recommendations, and those recommendations have to be given particular weight.
The final rule impacts the salary basis threshold, but it did not at all impact the duties test. Those duties all still remain intact, are not at all impacted by what we’re talking about. Only the salary based component was impacted.
Stutzman: If I’m an executive employee, and I’m doing those executive functions that you just described, as long as I’m being paid the equivalent of $35,568 or more I can continue forward in my exempt employee status. Is that right?
Liffrig: Mm-hmm (affirmative). Yep, that’s it.
Stutzman: Okay. Earlier on you had some verbiage, made reference to, nondiscretionary bonuses. Can you expand on that just a little bit more?
Liffrig: When we talk about the salary basis requirement, what we’re talking about is an employee has to be regularly receiving a predetermined amount of compensation each pay period, and that predetermined amount, the salary, can’t be reduced because of variations in the quality or quantity of the employee’s work.
Generally speaking, we say you’ve got to be paid on a salary basis, and that dollar amount doesn’t change from week to week or pay period to pay period, but under the final rule up to 10% of the minimum salary threshold can be satisfied by the payment of nondiscretionary bonuses, incentives, and commissions that are paid quarterly or more frequently. This just provides a little bit of flexibility to employers on the method of compensation so long as it’s still calculating or adding up to the right amount.
Stutzman: Okay. Got it. So the main takeaway there in terms of the nondiscretionary is that it provides a little bit more wiggle room in terms of how an employer gets to or above the newly increased amount of the annualized salary. Is that a fair summary?
Stutzman: Okay. Very helpful. I think you touched on this, but let’s talk about it a little bit more. You made reference to the highly compensated employee exemption. What’s the background story there, and how does the final rule impact that?
Liffrig: Highly compensated, or HCEs, are just another category of exempt employees. So again, exempt from minimum wage and overtime requirements, and as we’ve talked about already in order to be considered exempt under the FLSA, generally have to meet a duties test and a salary basis test. Same rules apply to the HCE exemption generally, but under the HCE exemption the salary basis standard is much higher, much more stringent, and the duties requirement is much simpler and easier to meet.
To get into the details, under the HCE exemption an employee can be deemed exempt if they meet this higher salary basis test instead of being $35,568 annually it’s $107,432 annually. From a duties perspective, they just have to have a primary duty that’s either office or non-manual work, and they have to customarily and regularly perform at least one of the exempt duties of an exempt executive, administrative, or professional employee. Much, much lower standard from a duties perspective, higher dollar requirement.
Stutzman: Okay, that makes sense. The higher the dollar if you hit the HCE test or exemption then some of those duties fall by the wayside. Is that right?
Liffrig: Mm-hmm (affirmative).
Stutzman: Mary Kate, I think you touched on this before, but is it a fair statement to say that this is the first time in quite a long time that the salary thresholds have been increased?
Liffrig: Yes. Prior to the change that went into effect this January, the salary basis threshold had been at a lower since 2004. There was an effort, a failed effort, to increase the salary threshold under the FLSA back in 2016, but this is really the first time that the rule has gone into effect. The 2016 rule was just like the 2019 rule, establishing a new salary threshold, but it was significantly than what we have in the 2019 rule. Back in 2016, the salary basis requirement would have been bumped up to $913 a week or just about $47,500 annually. That’s not the exact number but close enough for our needs. Again, very significant jump.
Before that could go into effect, though, a district court in Texas enjoined the rule, and then ultimately the 5th Circuit struck it down, and it just ended up languishing. We didn’t see anything on that for several years, and then earlier in 2019 we finally got a proposed rule setting these more moderate salary bumps.
Stutzman: I think if memory serves me correctly, there’s some inside baseball, some inside politics going on back at the timeframe of the 2016 rule. That 2016 rule which would have increased the salary threshold to an even higher point of what it is now, that was a carryover from the Obama Administration. Is that right?
Liffrig: Yep, it was.
Stutzman: Okay. That would make sense because I think with the higher dollar amount, that means that a larger group of people would be entitled to overtime payments. Is that right?
Liffrig: Yeah, that is right. When this new rule was published in 2019, the Department of Labor estimated that about 1.3 million people who would otherwise be exempt on the prior salary basis threshold set in 2004 would become eligible for overtime. In addition, the Department of Labor estimated about 101,800 workers would have been impacted by the increased salary basis requirement for highly compensated employees. You can imagine if the threshold for the salary basis had been bumped even higher, the number of employees would have been even higher as well.
Stutzman: Okay. All right, got it. There’s your inside baseball for the day. Switching gears slightly, Department of Labor as this past year has frankly been pretty active. I’m looking at a headline, what is it PR piece put out by the Department of Labor. It notes that in 2019 employers paid out a record $322 million to resolve Department of Labor wage claims. That I believe was in 2019 alone.
Liffrig: Oh wow.
Stutzman: So, it’s a lot of money at stake. From a big picture standpoint, the point is that wage and hour, even just looking on the federal side, is a high risk area for employers, and many employers are not really doing it the right way. Not intentionally but just often times there’s honest mistakes in that regard.
Mary Kate, in practical terms now that the final rule is in effect, what should employers be doing? What should employers be thinking about? What steps can they take to just make sure that their house is in order from a wage an hour standpoint?
Liffrig: With regard to the final rule specifically, I think the first thing that employers need to do is look at their exempt employees and specifically those exempt employees whose salaries are less than what the final rule’s requirements are. They may have been exempt under the salary basis threshold set in 2004, but they’re not hitting the requirement now that this new rule went into effect January 1st. Look at those people and figure out how we’re going to bring them into compliance.
There’s really two ways to do that. One is you reclassify those individuals as nonexempt, make them eligible for minimum wage, make them eligible for overtime. Or you start paying them more and increase their salaries to meet the final rule salary levels. That’s for both your exempt professionals under the executive, professional, administrative, and salaried computer workers exemptions, or under the highly compensated employee exemption.
That’s really all we need to do from an immediate perspective under the final rule. I guess again as a note, look at your state laws, make sure you’re in compliance with those as well with regard to all of your pay practices.
Then now it’s also a good time to just make sure everyone is appropriately classified. If you’re looking at people’s classifications, it’s the right time to make sure that, “Hey, if we’re classifying this person as exempt are they truly meeting the duties requirements? Are they really meeting the salary basis requirements?” Because Dana, you’re right. The Department of Labor has been very active this year. They’ve issued proposed rules that we’re still waiting to see what happens with, but we’ve gotten several this year.
We’ve gotten proposed rules on joint employment, on how to calculate the regular rate, on how to calculate overtime when you’re using a fluctuating work week, and again they’re at a proposed stage, but those rules could come out in the near future. We’ve also seen a lot of opinion letters this year. So yeah, the Department of Labor has been very active. It’s just an especially good time to review policies, review pay practices, review exempt determinations and worker classification.
Stutzman: Sure. That’s a good springboard to an online wage and hour assessment tool that Hall Render has put out to help employers navigate these rather thorny wage and hour issues because there are so many of them. It’s web based, relatively straight forward to click through. You don’t even have to have a lot of detailed information at your fingertips because the way that this online assessment is set up, it has a response button that says, “I don’t know the answer to this question,” and that’s okay.
Shameless plug called LYRIC assessment. LYRIC stands for Lower Your Risk Improve Confidence, and the website is www.LYRICassessment.com. Literally you spell it out. LYRIC is L-Y-R-I-C, assessment A-S-S-E-S-S-M-E-N-T. www.lyricassessment.com. It’s password protected because there is the exchange of potentially confidential attorney client and work product information through that portal, but please feel free to hit me up. Either call me or email me, and I’m happy to convey the password to you.
You get into that website, it has a survey that takes maybe 10-15 minutes, and then it outputs on the backend a risk profile, and then from there the Hall Render attorneys can help you walk through what compliance issues need to be cleaned up.
So for example I’m looking at the website right now, and we have this ongoing ticker on the righthand side that shows all the different kind of latest and greatest news and headlines in which employers have had to pay out big dollar amounts for wage and hour violations. So I’m looking at the previously mentioned $322 million recovered by the DOL. There are some high applying contractors that had to pay $12,700. There’s a headline about a $27,155 for a wage and hour violation. Another employer had to pay $190,000 for a wage and hour violation.
The point is this thing gets updated on a weekly basis, and there’s always employers that are making the headlines. We don’t want any of our clients to make those headlines, so that’s the purpose of the assessment.
Mary Kate, any closing thoughts? Any final words of wisdom that you want to pass along to the listeners?
Liffrig: Yeah, I guess I would just reiterate that these wage and hour issues, like you were just describing, they’re hugely expensive for employers, and that’s because these wage and hour issues are typically going to impact an entire class of people. That’s why we end up seeing class and collective actions on the wage and hour front.
So if you’re misclassifying one employee, you may be misclassifying a lot of employees. If your policies are problematic then your policies are problematic for all of the employees they apply to. It’s just another reason that it’s important to take this seriously, and it’s a good time to do a refresh now that we’re at the beginning of the year.
Stutzman: So it’s a subtle point. I think in particular what our healthcare clients with health system clients, one policy, one single policy could unintentionally negatively impact a couple thousand employees. So that’s where it’s high stakes, high risk. That said, I hope that you found this discussion helpful, and we’ve just about bumped up into a time limit for our time today. I wanted to thank you, the listener, for listening to the podcast. Mary Kate, thank you as well for joining us and providing us with this very helpful, timely information.
Finally, as a reminder to our listeners for more healthcare employment law content please visit our website at www.HallRender.com, and subscribe to our podcast. If you’d like to be added to our monthly newsletter, feel free to send me an email at my address. It’s dstutzman@HallRender.com. Thanks, everybody. Have a great day.