Highly Compensated Employee Exemption: The Other FLSA Exemption

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If you are like most employers in Northeast Ohio, as soon as the FLSA Final Rule was published back in May, your first step was to take a look at those employees on your payroll that make less than $47,476.

Embarking on this fact finding mission is a great place to start, but while employers are scanning their payroll records, there are two other dollar figures that are also worth a quick look to ensure full compliance with the Final Rule come December 1, 2016.

Although far less common than the Standard Salary Level change for Executive, Administrative, and Professional employees (EAP), employers will also need to assess the exempt status of any employees that fall under the “Highly Compensated Employee” (HCE) exemption.

How do I know if I have a “Highly Compensated Employee” (HCE)?

Currently, the dollar amount for the HCE is set at $100,000 annually, but under the new regulations this figure is increasing to $134,004 annually. However, as with the Standard Exemption, compensation alone does not determine the appropriate classification for an employee. The primary difference between the EAP exemption and the HCE exemption, apart from the salary cap, is the duties test itself.

For the HCE’s a “minimal duties” test is applied, which states—per the DOL’s own fact sheet on HCEs—that the minimum duties test is met if, “the employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee”.

While you may have many employees that meet the salary threshold, you may not have any employees that need to be categorized as HCEs. Instead, based on the job duties assigned to most of your employees making over the HCE salary threshold, these employees probably meet more than enough of the duties test to qualify as exempt under the EAP exemption. Again, given the six-figure salary number, in these cases, these individuals are probably more appropriately classified as “Executive” and therefore already fall under the EAP exemption.

What does the new Final Rule change for my HCEs?

Changes to employee classification resulting from the new compensation assessment for HCEs are likely mostly administrative in nature, but should still be reviewed in order to remain compliant. The only major change is the increased figure of $134,004. Also, keep in mind that these employees will also need to meet the new Standard Exemption level of $913 weekly in base salary (this can be in the form of either a set salary or fee per the regulations).

The requirement to meet the Standard Exemption level is no different, but the dollar amount itself has increased to fit the Final Rule. The rest, a minimum of $86,528 to be exact, would then come in the form of commissions and other nondiscretionary compensation/bonuses (also the same rule as before).

In addition, the HCE threshold will automatically update every three years to a level that meets the 90th percentile of annual earnings of full-time salaried workers nationally.

So who does this really impact?

Per initial estimates the changes to the HCE exemption will impact about 36,000 employees (in contrast an estimated 4.6 million workers will be impacted by the change to the Standard Exemption Salary increase) Again, the key numbers to look at here are any employees that fall between $100,000 and $134,004 annually.

As an example, if an exempt employee is currently making $120,000 annually and upon review of their job duties, does NOT fully meet the duties test for EAP employees, (and the employer chose not to increase their compensation to meet the new $134,004 threshold or restructure the makeup of their total compensation package to get to this number—there are lots of options!) then this individual’s status would need to change to non-exempt.

Disclaimer: ERC does not provide qualified legal opinions. Information obtained through the site and services should not be relied upon or considered a substitute for legal advice. The information ERC provides is for general employer use and not necessarily for individual application. ERC recommends that you consult legal counsel for workplace matters.

ERC Training provides FLSA Training which provides a high-level review of the law's elements and requirements.

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Questions Answered About the Proposed FLSA Changes: Overtime Rule

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Accurately categorizing your employees as “exempt” or “non-exempt” from the Fair Labor Standards Act (FLSA) sounds like a fairly straightforward task. But a closer look at the finer details of the FLSA can quickly turn an easy yes/no question into a complex, and somewhat subjective, analysis or job duties, titles, and compensation.

According to the U.S. Department of Labor’s (DOL) Wage & Hour Division, the current administration is looking to, “simplify the overtime rules for employers and workers alike,” specifically in the area of white collar exemptions, and has recently completed a comment period for new set of proposed overtime rules.

Although it is up for debate whether or not the proposed rules have achieved this goal of simplification, employers need to be aware of what these changes are and begin to prepare themselves for 2016 when some version of these rules are likely to be implemented.

What is changing (more than likely)?

The salary level required to be classified as an exempt employee for both standard and Highly Compensated Employees (HCEs) will increase.

The existing standard salary threshold to qualify as exempt, is set at $455 per week. The existing HCE threshold is $100,000. The proposed new rule sets the threshold for both categories based on average weekly earnings for full-time salaried workers. For standard salaried employees the 40th percentile mark will be used and for HCEs, the 90th percentile will be used. In terms of what these percentiles mean for setting actual dollar amounts, based on 2016 projections from the DOL the new thresholds will be $970 in average weekly earnings for the standard level and $122,148 annually for HCEs.

The bottom line: The specific dollar figures cited in the proposed language may be adjusted in the final rule, but in short, the salary amounts required to be considered exempt from the white collar overtime rules are going up in 2016.

Both salary levels (standard & HCE) will be scheduled to increase on an annual basis.

The numbers currently on the books have not changed since the last set of rule changes in 2004. The latest iteration of the white-collar exemption language will increase annually in one of two ways, either: (1) attaching directly to the 40th (standard) and 90th (HCE) percentiles of earnings for full-time salaried employees or (2) adjusting both levels based on inflation (CPI-U).

The bottom line: Instead of going through the rulemaking process to increase the exemption thresholds, they will go up on an annual basis—based on what statistic is still to be determined.

What else was being considered as part of the proposed rulemaking during the comment period?

The DOL was looking for comments on two additional items, but is not planning to make regulatory changes based on this feedback.

(1) The so called “duty test”, which is the next step in determining an employee’s exempt status, was also up for discussion. However, instead of implementing wholesale, official regulatory changes, the DOL was looking for additional examples of job titles and practical job duties that could be used as guidance for determining exemption status. (2) In addition, they were gathering opinions about whether or not nondiscretionary bonuses can/should be factored into the average weekly earnings of the standard salary calculation.

The bottom line: The DOL wants to gauge if the “duty test” is working as it should and provide more practical guidance to make it more objective. However, they don’t plan to incorporate any official regulatory changes regarding “duties” into the final rule at this time.

What can employers do to prepare?

Until the final rule is announced, the key for employers will be to begin gathering the information necessary to apply the new test once it is known. Not only will this head off any current misclassification that you may uncover in the process, but it also situates employers to act as soon as the DOL releases the final language.

First and foremost, employers may want to perform an internal audit of their job titles and descriptions to ensure that they are appropriately classified as exempt or non-exempt. While employers always make sure jobs are classified correctly at the outset, these duties can look very different a few years down the road.

As individuals and job duties evolve depending on the skill set of the employee, the needs of the organization, or even changes to technology, HR isn’t always kept apprised of these changes in a timely fashion.

Taking stock of exactly what duties are being performed and making any necessary changes to job descriptions on a fairly regular basis can help prevent misclassification. In the case of the proposed changes to the FLSA, going through this internal review process is particularly important for any non-exempt employees making more than the current $23,600 figure, but less than the new threshold.

The bottom line: Be prepared. There is some down time between the close of the comment period earlier this month and the expected announcement of the final rule in 2016. Make use of this time to gather the job duty information now, so you can act promptly and efficiently when the time comes.

ERC Training provides FLSA Training which provides a high-level review of the law's elements and requirements.

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Survey Reveals Interesting Differences in How Organizations Select Candidates

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Survey Reveals Interesting Differences in How Organizations Select Candidates

While nearly all (98%) Northeast Ohio organizations conduct interviews as a means of evaluating job candidates for both exempt and non-exempt positions, data from the 2015 ERC Hiring Trends & Practices Survey reveals interesting differences among those that utilize other methods of selection.  

Differences in selection methods for exempt and non-exempt positions

Drug testing, physical exams, and employment knowledge or ability tests are performed more often for candidates applying for non-exempt positions. On the other hand, more employers use reference checks and pre-screening phone interviews for exempt positions. In addition, compared to non-exempt positions, ERC’s research found that 25% more organizations invite candidates applying for exempt positions back for a second interview.
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How to Determine if a Job is Exempt or Non-Exempt

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The terms non-exempt and exempt can cause a lot of confusion for workers and employers. Exemption status determines if you receive overtime pay for working more than 40 hours in a work week. The exemptions are governed by the Fair Labors Standard Act (FLSA).

Non-exempt 

Non-exempt employees must be paid at least the minimum wage and overtime pay for any work performed over 40 hours worked in a week. This time must be paid at a rate of time and one half of their regular pay rate for each hour of overtime.

Exempt

Exempt employees are not granted the same protection under the FLSA, therefore they are paid the same dollar amount regardless of the number of hours worked in a week. Exemptions from the overtime requirements of the FLSA are just that—exceptions to the rule. They are very narrowly construed, and as the employer, you will always bear the burden of proving that you have correctly classified an employee as exempt. When in doubt on the classification of a job, it is best to make them non-exempt.

For most professions, an individual is an exempt employee if he or she meets all of the following three tests: 

  1. Is paid at least $23,000 per year ($455 per week)
  2. Is paid on a salary basis
  3. Performs exempt job duties

But how do you know if the individual performs exempt duties?  As a general rule, exempt employees tend to perform relatively high-level duties with respect to the company’s overall operations.

The most common FLSA exemptions are white collar exemptions and are broken down into five main categories, including: 

  1. Executive
  2. Administrative
  3. Professional
  4. Outside sales
  5. Computer

Other issues

There are also some other concerns to consider when determining non-exempt and exempt status.

  • Time off. Although there are exceptions, it’s usually illegal to give non-exempt employees time off instead of paying them overtime.
  • Child labor. Federal and state laws include special requirements to protect workers under the age of 18. These laws can affect the type of work, wages, and hours that an employee can complete.
  • Breaks. Employers need to make sure they follow federal and state law requirements regarding breaks, including meal breaks, for their employees.

If you have any additional questions regarding non-exempt and exempt employees, and are an ERC Member, contact our HR Help Desk or visit the U.S. Department of Labor (DOL) FLSA page at http://www.dol.gov/whd/flsa/.

By providing you with information that may be contained in this article, the Employers Resource Council (ERC) is not providing a qualified legal opinion concerning any particular human resource issue. As such, research information that ERC provides to its members should not be relied upon or considered a substitute for legal advice. The information that we provide is for general employer use and not necessarily for individual application.  We also recommend that you consult your legal counsel regarding workplace matters when and if appropriate.

HR, compliance, termination, or compensation questions?

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3 Frequently Asked Questions about FLSA

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Employers usually have a number of questions about the Fair Labor Standards Act (FLSA), which governs wage and hour rules - when and how employers are obligated to pay employees for time worked or not worked under law. Here are answers to 3 frequently asked questions about issues related to FLSA.

1. Can we dock exempt employees' pay?

Some employers seek to dock or withhold pay as a disciplinary measure for exempt employees, particularly for reasons such as absenteeism, tardiness, or performance. Under FLSA, however, employers may not reduce an exempt employee's pay for showing up late, leaving work early, or because they did not perform the quality of quantity of work expected of them. Other guidelines regarding the docking of exempt employees' pay include:

  • If your organization has a written paid sick time, paid leave, or other time off policy, it may reduce the employee's sick or paid leave account for absences due to illness, injury, or medical appointments. 
  • Once an employee's sick or paid leave account is exhausted for these absences, you must pay employees for partial day absences unless they qualify under FMLA and are using intermittent leave. 
  • If your organization does not have a sick or paid leave policy and it is implied that employees receive pay for their absences, it cannot deduct pay for full or partial day absences for exempt employees.
  • Exempt employees who are new to the organization and not yet eligible to receive holiday or vacation pay, should generally be provided with it, given these above guidelines.

There are situations where your organization has the ability to dock or reduce pay of exempt employees, such as if they did not work some days during their first or last week of employment, were absent for an entire week, or received an unpaid disciplinary suspension. Deducting pay for exempt employees is usually permissible under these circumstances, however, you can only dock pay if employees are not working (i.e. not checking email, voicemail, etc.) in these situations.

2. For what time do we need to pay non-exempt employees?

Unlike exempt employees who are paid to complete a job, non-exempt employees only need to be paid for time worked, so naturally, the issue of what constitutes "working time" for non-exempt employees is a common question and issue employers face. Job-related or required training, department or staff meetings, and time spent on work travel are all considered working time for non-exempt employees and must be paid. This even includes seminars, training, or meetings on job-related topics held after hours.

In addition, unauthorized working time may also be considered time worked. Even though an employer may not specifically authorize an employee to work, non-exempt employees must be paid for all work they complete. For example, if a non-exempt employee works at home off-the-clock on their own accord, that time must be considered hours worked even though the time was unscheduled. Additionally, if an employee starts work early or stays late, that time must also be paid. Non-exempt employees must be paid for all hours worked.

Employers are increasingly facing this issue when non-exempt employees access work at home, such as via electronic devices like a Smartphone. For example, if a non-exempt employee sends an email to another employee outside of work hours, they are entitled to be compensated for the time spent responding to that email.

3. Is this job exempt or non-exempt?

Employees exempt from both the minimum wage and overtime pay requirements not only include those that fall under the Department of Labor's  exemptions for executive, administrative, professional, outside sales, and certain computer professionals, but seasonal employees who are employed at certain seasonal amusement or recreational establishments also fall under those exempt from these provisions. Correctly classifying employees as exempt or non-exempt can be tricky given the many guidelines for exemptions.

Terming employees "hourly" or "salaried" can commonly lead to issues of misclassification. Salaried employees are not automatically "exempt" and hourly employees are not automatically "non-exempt." Also, a professional, highly-skilled, or managerial-related job tile (such as engineer, analyst, administrator, or supervisor) does not sufficiently guarantee exemption. Employers need to evaluate employees' specific job duties (regardless of how they are paid) and their job title to determine exemption status, as well as use specific tests to determine their status.

Outdated job descriptions can commonly lead to issues with FLSA compliance so it's important to regularly update them, determine their accuracy, and conduct FLSA audits or evaluations to determine if a job is exempt or not. Job descriptions should accurately depict what an employee actually currently does in the position because they are the most crucial element to deciphering a position's FLSA status according to exemption tests.

FLSA is a difficult and complex law to administer in the workplace, and as a result workplace violations are easily made. Understanding the common pitfalls faced by other employers, however, can help your organization stay compliant with the law's many provisions.

Please note that by providing you with research information that may be contained in this article, ERC is not providing a qualified legal opinion. As such, research information that ERC provides to its members should not be relied upon or considered a substitute for legal advice. The information that we provide is for general employer use and not necessarily for individual application.