Memorandum Raises Price Tag for Exempt Employees

The Fair Labor Standards Act (“FLSA”) is the federal statute that requires all employees receive minimum wage for each hour worked and requires all non-exempt employees to receive overtime pay of time-and-a-half for each hour worked per week over 40 hours.

One type of employees – known as exempt employees – are not entitled to overtime pay under the FLSA if certain requirements are met. Arguably the most commonly used exemption by employers is for executive, administrative, or professional employees.

This executive, administrative, or professional exemption includes several complicated requirements that must be satisfied in order for an employee to legally be exempt from overtime under the FLSA. The single, straightforward requirement until now was that the employee must receive a salary of at least $455/week to qualify for this exemption.

Last Thursday, however, President Obama signed a memorandum requiring the Secretary of Labor to increase the salary requirement for the executive, administrative, or professional exemption. This salary requirement of $455/week was established in 2004. Adjusting for inflation, $455/week in 2004 is actually worth $553/week today.

Although the federal rule was originally designed to limit overtime for highly paid employees, the failure to raise the salary requirement for the last ten years means that it now covers workers earning as little as $23,000 a year.  As the President noted in a White House signing ceremony on March 13, 2014, “It doesn’t make sense that in some cases this rule actually makes it possible for salaried workers to be paid less than the minimum wage…. If you’re working hard, you’re barely making ends meet, you should be paid overtime. Period.” US Dept of Labor Newsletter, March 13, 2014.

As with all stories, there are two sides to President Obama’s memo. Businesses are crying out that raising the salary requirement also raises the cost of business and reduces the incentive for businesses to hire new employees. Supporters of the raise in salary counter by arguing that the raise will give the employees more money to spend, thus stimulating the economy.

Failure to meet the minimum salary requirement of the executive, administrative, or professional exemption means that the non-exempt employee is entitled to overtime pay. Failure to pay overtime to a non-exempt employee could result in damages against the business, as well as its individual owner, in triple the amount of unpaid overtime, plus the employee’s attorneys’ fees.

Savvy business owners will keep a close eye on Secretary of Labor Tom Perez in the coming months and may expect enforcement action as the Department of Labor seeks to make examples of businesses not complying with the updated rule.  If you are in any doubt about your obligations under the FLSA, or any other employment law, the employment lawyers at Briskin, Cross & Sanford will be happy to speak with you.

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