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New DOL Salary Levels for FLSA-Exempt Employees

The Department of Labor (“DOL”) has finally issued final rules revising the salary levels that will be used to determine if certain employees are exempt from the overtime provisions of the Fair Labor Standards Act (“FLSA” or “the Act”). These rules will appear in the May 23, 2016, edition of the Federal Register and have an effective date of December 1, 2016.

Under the FLSA, employees are entitled to be paid time and a half for all hours worked in excess of a normal work week, usually 40 hours. However, the Act exempts employees in executive, administrative, or professional positions from the overtime provisions. In addition, outside sales employees and certain computer professionals are also exempt.

DOL has promulgated regulations implementing the Act in Title 29, Section 541 of the Code of Federal Regulations. Under those rules, for an employee to be exempt from the FLSA overtime provisions, an employee has to meet a duties test and salary test. In other words, even if an employee meets the duties test for an executive, if the employee is paid less than the salary level, the employee is entitled to receive overtime pay for each hour worked in excess of 40 hours per week. The revised DOL rules have not changed the duties tests for determining who is exempt. What they have done is change the salary test by increasing it substantially.

Under the new rules, to qualify as an exempt executive, administrative or professional employee under the Act, an employee must be compensated on a salary basis at a rate per week of not less than the 40th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region which is currently $913 ($47,476 annualized), exclusive of board, lodging or other facilities. Beginning January 1, 2020, and every three years thereafter, DOL will update the required salary amount.

In regard to computer specialists, there are two exemptions from the Act. One deals with employees paid on a salary basis and the other applies to employees paid on an hourly basis. The new rules only affect those employees paid on a salary basis. For those employees to be exempt, they must receive a salary of at least $913 a week. The hourly wage exemption remains the same and applies to employees receiving wages of at least $27.63 an hour.

Finally, the revised rules now permit employers to pay up to ten (10) percent of the required salary amount by the payment of nondiscretionary bonuses, incentives, and commissions that are paid quarterly or more frequently. This is a new concept in the rules.

These revised rules can present challenges to contractors. There is no Federal Acquisition Regulation clause that specifically addresses the payment of overtime under the FLSA. The Service Contract Act price adjustment clause only covers adjustments to compensate contractors for the payment of higher wages or fringe benefits under a revised wage determination. Thus, any increased overtime payments would not be included in that adjustment. Further, because the new rules apply to companies other than contractors, they would be considered a part of the act of governing and would be considered a sovereign act. Contractors are not entitled to contract adjustments for sovereign acts unless there is a contract clause providing for such an adjustment.

We anticipate that the greatest impact on contractors will be in regard to indirect costs. Many employees who perform indirect cost functions probably were exempt from the FLSA overtime provisions under the old rules. However, beginning December 1, 2016, they will be subject to receive overtime pay. This can have an impact on indirect cost rates and is something contractors should be planning for now so that provisional rates can address the impact of the new rules.

For questions related to the final rules, feel free to contact a member of Cherry Bekaert’s Government Contractor Services Group.

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