In late June of 2015, President Obama announced changes to the executive exemptions included in the Fair Labor Standards Act of 1938 (“FLSA”) – the federal law that regulates pay for employees. This change will go into effect sometime in 2016. What this means for employers is that they will need to reassess which employees they have classified as exempt to ensure that they meet the salary threshold.
The three primary exemptions to the overtime requirements are for executive, administrative and professional employees. All three require that the employee be paid on a salary basis and the current requirement is that the salary be at least $455 per week, or $23,660 annually. President Obama is raising that salary requirement to $50,400, more than doubling the pay rate.
The other requirements for the three exemptions are as follows:
- Executive exemption: The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
- Administrative exemption: The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and must include the exercise of discretion and independent judgment with respect to matters of significance.
- Professional exemption: There are two subclassifications under this category. I) A learned professional is an employee whose primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; has advanced knowledge in a field of science or learning; and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. II) A creative professional employee is one whose primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
It is good practice to periodically review the classifications of exempt employees to ensure that they really do meet these tests. With the resetting of the salary basis, all exempt classifications need to be checked to ensure that the subject employees are paid at least that much in salary. If they are not, their employers will either need to raise their pay or reclassify them as non-exempt and pay time and a half for all overtime hours worked.
This change in the law will not be effective until 2016, but as employers enter the third quarter of 2015 and are thinking about budgets for 2016, these pay rates should be reviewed in anticipation of the change.
 A full list of all exemptions and the tests associated with them can be found at the Department of Labor’s website at http://www.dol.gov/whd/overtime/fs17a_overview.pdf.