NLBMDA Regulatory Guidance:
New Department of Labor Overtime Rule
On May 18, 2016, the U.S. Department of Labor issued a new rule affecting the regulations on overtime pay: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.
What Changed?
The standard salary threshold for full-time salaried "white collar" workers (also referred to as executive, administrative or professional, or EAP, employees) is increased from $455 per week to $913 per week (or from the current annualized $23,660 to $47,476). This number is based on the 40th percentile of full-time salaried workers in the lowest-wage Census region (currently the South) and will be adjusted accordingly every three years.
The highly compensated employees (HCE) salary threshold for full-time salaried workers is increased from $100,000 to $134,004 per year. This number is based on the 90th percentile of full-time salaried workers nationally, and will be adjusted accordingly every three years.
The new rule also allows up to 10 percent of the salary threshold for non-HCE workers to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. With the new standard salary threshold of $47,476 effective December 1, 2016, "up to 10 percent" of this amount is $4,747.60 (or $91.30 per week).
The Department is changing the regulations to allow non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement. Such bonuses include, for example, non-discretionary incentive bonuses tied to productivity or profitability (e.g. a bonus based on the specified percentage of the profits generated by a business in the prior quarter). The Department recognizes that some businesses pay significantly larger bonuses; where larger bonuses are paid, however, the amount attributable toward the EAP standard salary level is capped at 10 percent of the required salary amount. For employers to credit non-discretionary bonuses and incentive payments (including commissions) toward a portion of the standard salary level test, such payments must be paid on a quarterly or more frequent basis.[1]
When the new rules go into effect, an employer can pay an employee a base salary of at least 90% of the salary threshold (or $821.70) and then make up the remaining 10% with non-discretionary bonuses and incentive compensation. If at the end of the 13 week quarter the employee's base salary plus his or her non-discretionary bonuses and incentive compensation are not at least $11,869 ($913 x 13 weeks) on the next payday after the end of the quarter, the employer can pay the employee the difference between the employee's actual earnings and $11,869 without the employee losing his or her exempt status.[2]
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[1] See Department of Labor Questions and Answers at
https://www.dol.gov/WHD/overtime/final2016/faq.htm#S1, "Non-discretionary Bonuses and Incentive Payments," Question and Answer 1. See also an explanation of the difference between discretionary and non-discretionary bonuses and "catch-up" payments that employers may make at the end of any given quarter if the employee does not receive enough non-discretionary bonuses and incentives for that quarter.
[2]
See Small Business Legislative Council Report (May 19, 2016).
Effective Dates
The effective date for the new thresholds is December 1, 2016.
These threshold levels will automatically update every three years, beginning January 1, 2020.
The Department of Labor will post the new salary levels 150 days in advance of their effective date, beginning August 1, 2019.
According to a White House Fact Sheet on the new rule, the new threshold of $47,476 is expected to rise to $51,000 on January 1, 2020.
What Did Not Change?
The new rule does not change the three basic tests that a worker must meet in order to claim a white collar exemption: 1) employee must be paid on a salary basis not subject to reduction based on quality or quantity of work ("salary basis test"); 2) salary must meet the applicable threshold amount ("salary level test"); and 3) primary job duty must involve work associated with executive, administrative, or professional employees ("standard duties test").
The new rule does not change the elements of the duties test that all white collar exempt employees must meet, regardless of salary. For workers with salaries above the updated standard salary threshold, employers will continue to use the duties test to determine if the worker is entitled to overtime pay.
The new rule does not change the various exemptions to the overtime rule for executive, administrative and professional workers and other employees. For example, the new rule does not change the Outside Sales Exemption or the Motor Carrier Exemption.
Nor does the new rule change how employers may use bonuses to satisfy the HCE salary threshold:
The Department has not made changes to how employers may use bonuses to meet the salary level component of the HCE test. To claim the HCE exemption under the Final Rule, employers must pay workers at least the standard weekly salary level of $913 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. Because employers may fulfill almost two-thirds of the HCE total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation, the Department determined that it would not be appropriate to permit employers to also use nondiscretionary bonuses and incentive payments to satisfy the standard salary amount.[3]
Special Note on the Importance of the Duties Tests
It is important to continue to focus on the employee's duties, both for purposes of satisfying the basic White Collar Exemption and for satisfying the exemptions for outside sales or motor carriers. This is particularly important where the employer may consider re-configuring an employee's duties given the new salary thresholds.
Special Consideration: Outside Sales
Outside Sales Exemption: The new rule does not change the general exemption for outside sales employees. The final rule notes: "An exempt outside salesperson must be customarily and regularly engaged away from the employer's place of business and have a primary duty of making sales, or obtaining orders or contracts for services or for the use of facilities. There are no salary or fee requirements for exempt outside sales employees."
To qualify for the outside sales exemption, all of the following must be met: 1) the employee's primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a compensation will be paid by the client or customer; and 2) the employee must customarily and regularly be engaged away from the employer's place or places of business.
The phrase "customarily and regularly" means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks. The phrase "away from employer's place of business" means that the outside sales employee makes sales at the customer's place of business. Outside sales does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls. According to Department of Labor's Fact Sheet #17F: Exemption for Outside Sales Employees Under the Fair Labor Standards Act (FLSA), "any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer's places of business, even though the employer is not in any formal sense the owner or tenant of the property."
White Collar (EAP) Exemption: If the salesperson does not meet the two criteria above, then he does not qualify for the Outside Sales Exemption. For instance, if he works from his office making phone calls and is rarely away from the office calling on customers, then he does not qualify for the exemption. However, he may qualify for the standard White Collar (EAP) Exemption. The new rule allows commissions that are paid on at least a quarterly basis to count for up to 10% of the standard salary threshold. Note: To qualify for the White Collar (EAP) Exemption, the employee must meet the duties test for one of the following three classifications: Executive, Administrative or Professional. See the Department of Labor's Fact Sheets #17B, #17C, and #17D listed below.
Highly Compensated Employee Exemption: If the salesperson does not meet the Outside Sales Exemption or the standard White Collar Exemption, she may still be exempt under the Highly Compensated Employee (HCE) Exemption. The new rule does not change the ability to use commissions towards meeting the HCE threshold amount. Under the new rule effective December 1, 2016, if she is paid at least the new standard threshold amount, then her commissions may count towards his total compensation. Note: To qualify for the (HCE) Exemption, the employee must meet the applicable duties test. See the Department of Labor's Fact Sheet #17H listed below.
Example A: Peter is paid an annual base salary of $25,000 to make sales and take orders. Peter makes $40,000 in commissions. Peter qualifies for the Outside Sales Exemption only if he meets the two criteria: 1) his primary duty is making sales or obtaining orders; and 2) he is customarily and regularly engaged away from the employer's place of business. The Outside Sales Exemption is not subject to the standard salary threshold. In this case, the amount of commission that Peter earns is immaterial to meeting the Outside Sales Exemption.
Example B: Paul is paid an annual base salary of $25,000 to make sales and take orders. He makes $40,000 in commissions. Paul does not meet one or both of the two criteria above; therefore, he does not qualify for the Outside Sales Exemption; however, it is possible Paul may qualify for the White Collar (EAP) Exemption. In this case, Paul does not qualify for the EAP exemption because under the new rule effective December 1, 2016, only $4,747.60 of the $70,000 commission may count towards the standard salary threshold and Peter's base salary of $25,000 plus $4,747.60 does not meet the new $47,476 standard salary threshold.
Note: Even if Paul earned $70,000 in commissions, only $4,747.60 could be applied towards the standard threshold. In order for Paul to qualify for the EAP exemption, as of December 1, 2016, he must have a base salary of $42,729 and commissions (plus any non-discretionary bonuses) of at least $4,747.60.
To qualify for the HCE exemption, Paul's total compensation of salary, non-discretionary bonuses and commissioners must meet the new threshold of $134,004. Even though all of Paul's $40,000 in commissions may count towards his compensation, he does not meet the HCE exemption on two accounts: 1) his base pay is below the new standard salary threshold of $47,476; and 2) his combined base salary of $25,000 plus commission of $40,000 does not meet the new HCE salary threshold of $134,004.
Example C: Mary is paid an annual base salary of $47,476 to make sales and take orders. Mary makes $70,000 in commissions. Mary does not meet one or both of the two criteria above; therefore, she does not qualify for the Outside Sales Exemption. However, it is possible Mary may qualify for the HCE Exemption. In this case, Mary would not qualify, even though the entire amount of the $70,000 in commissions may be used towards the HCE threshold amount of $134,004.
Special Consideration: Motor Carrier
The new rule does not change the general exemption for motor carriers. The final rule notes: "This exemption eliminated overtime pay for 'any employee with respect to whom the Secretary of Transportation has power to establish qualifications and maximum hours of service pursuant to the provisions of Section 31502 of Title 49'.... To be exempt, these workers must engage in 'safety affecting activities'. Examples of exempt occupations include: 'driver, driver's helper, loader, or mechanic'."
See: Fact Sheet #19: The Motor Carrier Exemption under the Fair Labor Standards Act.
The Motor Carrier Exemption applies when: 1) the employee is employed by a motor carrier or motor private carrier; 2) the drivers, driver's helpers, loaders, or mechanics perform duties that affect the safety operation of motor vehicles in transportation on public highways interstate commerce; and 3) the employee is not covered by the small vehicle exception.
The following duties test must be met to qualify for the Motor Carrier Exemption:
1) The employee's duties must include the performance, either regularly or from time to time, of safety-affecting activities on a motor vehicle used in transportation on public highways in interstate or foreign commerce. Employees must perform such duties as a driver, driver's helper, loader, or mechanic. Note Employees performing such duties meet the duties requirement of the exemption regardless of the proportion of "safety affecting activities" performed, except where the continuing duties have no substantial direct effect on "safety of operation," or where such safety affecting activities are so trivial, casual, and insignificant as to be de minimis (so long as there is no change in the duties).
2) Transportation involved in the employee's duties must be in interstate commerce (across State or international lines) or connect with an intrastate terminal (rail, air, water, or land) to continue an interstate journey of goods that have not come to rest at a final destination. In addition, an employee who has not made actual interstate trip may still meet the duties requirement if: a) the employer is shown to have an involvement in interstate commerce; and b) the employee could, in the regular course of employment, reasonably have been expected to make an interstate journey or could have worked on the motor vehicle in such a way as to be safety-affecting.
Note: Attention is given to whether the employee is involved in "safety affecting activities". The Section 13(b)(1) overtime exemption does not apply to employees not engaged in "safety affecting activities", such as dispatchers, office personnel, those who unload vehicles, or those who load but are not responsible for the proper loading of the vehicle. Only drivers, drivers' helpers, loaders who are responsible for proper loading, and mechanics working directly on motor vehicles that are to be used in transportation of passengers or property in interstate commerce can be exempt from the overtime provisions of the FLSA under Section 13(b)(1).
The Motor Carrier Exemption does not apply to drivers of motor vehicles weighing 10,000 pounds or less in transportation on public highways in interstate or foreign commerce.
Recommended Department of Labor Resources
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