This document discusses updates to the Fair Labor Standards Act (FLSA) overtime regulations that were finalized in May 2016 and take effect in December 2016. It provides background on the FLSA, including that it requires minimum wage and overtime pay for hourly workers. It discusses the exemptions for executive, administrative, professional, and other white-collar jobs if certain salary and duties tests are met. The new regulations increase the salary threshold for these exemptions to $47,476 per year. It also allows bonuses to count for up to 10% of the salary requirement and establishes automatic updates every 3 years. Some are challenging these changes through legislation but it is unlikely to pass before the effective date. Employers are advised to identify impacted employees

1. In-House Defense Quarterly ■ Summer 2016 ■ 29
YOUNGLAWYERS
■■ Sophia Lauricella is a litigation attorney practicing at Sheehy, Ware & Pap-
pas in Houston, TX. Sophia represents both public and private companies in
premises liability, product liability, and employment matters throughout Texas
and Louisiana. In addition to her work, Ms. Lauricella is a member of the
Junior League of Houston.
Employment Law, Wages, and the FLSA
We all recall the Occupy Wall
Street campaign that set into
motion a national discussion
about wage disparity in the
United States. Some politicians speak of
“class warfare,” while others attack the
so-called “one percent” in the hope of
winning elected office. By 2014, however,
the increasing unrest among not only
hourly workers, but also salaried workers,
demanded action. In response, President
Barack Obama signed a Presidential Mem-
orandum on March 13, 2014, directing the
Department of Labor to update the regu-
lations defining which white collar work-
ers are protected by the FLSA’s minimum
wage and overtime standards. 79 FR 18737
(Apr. 3, 2014). Simply put, the goal was to
determine what is a fair day’s pay for a fair
day’s work? To find out, the Department of
Labor embarked on a more than one year
journey to determine: 1) the appropriate
salary level for exemption; 2) what, if any,
changes should be made to the duties tests;
and 3) how to simplify the regulations.
The department’s efforts culminated in
the July 6, 2015, proposed rule publication
of Defining and Delimiting the Exemptions
forExecutive,Administrative,Professional,
Outside Sales, and Computer Employees,
80 F.R. 38515. The comment period con-
cluded on September 4, 2015. Since that
time, the department has reviewed approx-
imately 270,000 comments and finalized
the rule on May 18, 2016. Curiously, no
changes to the current duties test occurred.
Summary of the Current Fair
Labor Standards Act (FLSA)
The Department of Labor’s website states
that the FLSA guarantees a minimum wage
and overtime pay at a rate of not less than
one and one-half times the employee’s reg-
ular rate for hours worked over 40 in a work
week. While these protections extend to
What Updates to the Fair Labor Standards
Act Mean for Your Business
By Sophia L. Lauricella
YOUNGLAWYERS
© 2016 DRI. All rights reserved.

2. 30 ■ In-House Defense Quarterly ■ Summer 2016
YOUNGLAWYERS
most workers, the FLSA provides a num-
ber of exemptions. The exemption from
minimum wage and overtime pay includes
executive, administrative, professional,
outside sales, and computer employees.
This exemption is referred to as the FLSA’s
“EAP” or “white collar” exemption. To be
considered exempt, employees must meet
certain minimum tests related to their pri-
mary job duties and be paid on a salary
basis at not less than a specified minimum
amount. See Auer v. Robbins, 519 U.S. 452
(1997). The standard salary level required
for exemption, as reported by the Depart-
ment of Labor, is currently $455 a week
($23,660 for a full-year worker) and was
last updated in 2004. The Department of
Labor’s website currently reports the pov-
erty line for a family of four at $24,008.
Many employer-employee disputes over
compensation hinge upon whether the
employee is exempt from overtime pay.
A couple of common exemptions are the
learned professional and administrative
employee exemptions. It is well established
that the employer bears the burden of prov-
ing the employee’s exempt status and that
exemptions are to be narrowly construed
against the employer. Paul v. Petroleum
Equip. Tools Co., 708 F.2d 168, 170 (5th Cir.
1983). The FLSA provides two tests known
as the “salary” test and the “duties” test
to evaluate whether an employee is a pro-
fessional and/or administrative employee.
Bass v. City of Jackson, Miss., 540 F. App’x
300, 301-02 (5th Cir. 2013) (Mem. op.).
The salary test is straight forward. An
employee must be compensated on a sal-
ary basis at a rate of not less than $455 per
week. 29 C.F.R. §541.300. The duties test,
however, is where contentions almost al-
waysarise.Underthedutiestestforlearned
professionals, the employee’s primary duty
mustentailtheperformanceofworkrequir-
ingknowledgeofanadvancedtypeinafield
of science or learning customarily acquired
by a prolonged course of specialized intel-
lectual instruction. 29 C.F.R. §541.300. Pri-
mary duty has been further defined as the
principal, main, major, or most important
duty that the employee performs. Determi-
nation of an employee’s primary duty must
bebasedonallthefactsinaparticularcase,
withthemajoremphasisonthecharacterof
the employee’s job as a whole.
The Department of Labor’s Adminis-
trator interpreted the primary duty test in
2005 with respect to learned professionals.
The administrator’s opinion focuses on the
first element, work requiring knowledge of
an advanced type, of the primary duties
test. The opinion indicates that a job label
is never enough as “this test is not simply
met by holding a bachelor’s degree in a spe-
cialized field like engineering; the outcome
dependsuponwhethertheparticularjobre-
quires the employee to apply that advanced
knowledge.”See29C.F.R.§541.200;F.L.S.A.
2005-28 at 2 (Dep’t of Labor Aug. 26, 2005).
Inshort,elementnumberoneisafactques-
tion for a jury to decide. Key distinctions
in the FLSA that have proven successful
for employers arguing in favor of exemp-
tion are the exercise of discretion versus
the performance of routine mental, man-
ual, mechanical, or physical work; and the
degreeofanalysis,interpretation,ordeduc-
tions from varying facts or circumstances
thejobrequires.29C.F.R.§541.301(b).This
can be tricky. For example, attorneys have
historically been categorized as learned
professionals. Further, the Department of
Labor specifically exempts employees with
valid licenses to practice law or medicine if
the employee is actually engaged in such a
practice.Nonetheless,litigationiscurrently
pending over whether document review at-
torneys are learned professionals engaged
in the practice of law. See Lola v. Skadden,
Arps, Slate, Meagher & Flom LLP, 620 F.
App’x 37 (2d Cir. 2015).
An important distinction between the
learned professional exemption and the ad-
ministrator exemption is that the learned
professional exemption is restricted to pro-
fessions where specialized academic train-
ing is a standard prerequisite for entrance
into the profession, i.e., attorneys, physi-
cians,etc.Thebestevidence ofmeetingthis
requirement is having the appropriate aca-
demic degree. However, the word “custom-
arily”meanstheexemptionmaybeavailable
to employees in such professions who have
substantially the same knowledge level and
perform substantially the same work as the
degreedemployees,butwhoattainedthead-
vanced knowledge through a combination
ofworkexperienceandintellectualinstruc-
tion. The Department of Labor has made it
clear that this exemption does not apply to
occupations in which most employees ac-
quire their skill by experience rather than
byadvancedspecializedintellectualinstruc-
tion. U.S. Dep’t of Labor, Wage and Hour
Division, Fact Sheet #17D: Exemption for
Professional Employees under the Fair La-
bor Standards Act, (Jul. 2008).
In 2010, the administrator again inter-
preted the duties test, but this time with
respect to administrative employees. The
FLSAexaminedmortgageloanofficerswho
collected and entered financial informa-
tion into a computer program that identi-
fies which loan products may be offered to
customers based on the financial informa-
tion provided. F.L.S.A. 2010-1 at 2 (Dep’t of
Labor Mar. 24, 2010). The focus of this in-
terpretation was on whether the primary
duty of employees who perform the typical
jobdutiesofamortgageloanofficerisoffice
or non-manual work directly related to the
managementorgeneralbusinessoperations
of their employer or their employer’s cus-
tomers. Id.; 29 C.F.R. §541.200(a)(2). This
analysis is also known as the administra-
tive versus productive test. After analyzing
a number of factors to be considered when
classifying employees as “outside sales”
persons, the administrator concluded that
a mortgage loan officers’ primary duty is
makingsalesand,therefore,mortgageloan
officers perform the production work of
their employers. F.L.S.A. 2010-1 at 6 (Dep’t
of Labor Mar. 24, 2010). Therefore, mort-
gage loan officers do not qualify as exempt
administrative employees.
■
To be considered exempt,
employees must meet certain
minimum tests related to
their primary job duties and
be paid on a salary basis
at not less than a specified
minimum amount.
■

3. In-House Defense Quarterly ■ Summer 2016 ■ 31
Updates to Salary
Thresholds in the FLSA
On May 18, 2016, the Department of Labor
updated the salary test through overtime
payregulationspertainingto“whitecollar”
exemptemployees.SeeDefiningandDelim-
itingtheExemptionsforExecutive,Admin-
istrative, Professional, Outside Sales, and
Computer Employees, 80 F.R. 38515 (Dep’t
of Labor Jul. 6, 2015). The effective date is
December 1, 2016. The Department of La-
bor’s wage and hour division outlines the
key changes as (1) setting the standard sal-
arylevelrequiredforexemptionatthe40th
percentile of weekly earnings for full-time
salaried workers in the lowest wage census
region, currently the South ($913 per week,
or$47,476annually);(2) increasingthetotal
annual compensation requirement needed
to exempt highly compensated employees
to the annualized value of the 90th percen-
tile of weekly earnings of full-time salaried
workersnationally($134,004annually);and
(3) establishes a mechanism for automati-
callyupdatingthesalaryandcompensation
levels every three years beginning January
1, 2020 to maintain the levels at the above
percentilesandtoensurethatwillcontinue
to provide a useful and effective test for ex-
emption. The Department also is updat-
ing the special salary level for employees
in American Samoa to $767 per week and
the special “base rate” for employees in the
motionpictureindustryto$1,397perweek.
A key change with respect to the
standard salary requirements is the use of
non-­discretionary bonuses and incentive
payments, including commissions, to sat-
isfy up to 10 percent of the new standard
salary level. This may result in many
employees who previously received a bonus
gaining a higher annual salary in lieu of a
bonus in 2017.
Beginning January 1, 2020, salaries will
be eligible for adjustment via a “mech-
anism”. The proposed mechanisms for
updating the standard salary levels going
forward are through either 1) the 40th per-
centile level of weekly earnings for full-
time salaried employees or 2) based on the
consumer price index for all urban con-
sumers (CPI-U). The CPI-U is compiled by
the Bureau of Labor statistics and reflects
the average cost, by expenditure category,
of living in a U.S. city. Currently, the cate-
gories include food, energy, transportation,
apparel, alcohol, tobacco, shelter and med-
ical services. This index fluctuates, and, at
times, does not always present an accu-
rate picture. For example, the March 2016
expenditure price for fuel oil is “not season-
ally adjusted.” Large increases or decreases
in prices within a single industry can cause
the CPI-U to fluctuate, disrupting the bud-
geting process for employers as the cost
of labor becomes increasingly variable.
Finally, “automatically updating the sal-
ary and compensation levels” implies that
the threshold annual salary can go down.
This presents a practical issue for employ-
ers. For example, in year X, a spike in the
price of oil may cause a spike in the CPI-U.
As written, the rule would require employ-
ers to increase threshold salaries in order
to comply with the automatic increase.
The next year when the oil price drops, the
CPI-U likely will as well. Employers, how-
ever, cannot reduce their employees’ sala-
ries, for at least two more years. Further,
reducing salaries in the event of a decline in
the CPI-U may cause employers to lose top
performers. Practically speaking, employ-
ers will likely continue paying the higher
salaries despite a very different economic
landscape.
Challenge to the Proposed FLSA
Overtime Changes in H.R. 4773
A recent effort to nullify the Depart-
ment of Labor’s proposed regulations is
being led by the Honorable Tim Walberg
and the Honorable John Kline in the U.S.
House Education and Workforce Commit-
tee. H.R. 4773, the Protecting Workplace
Advancement and Opportunity Act, was
introduced on March 17, 2016. The Con-
gressional Research Service reports that
the bill declares “Defining and Delimiting
the Exemptions for Executive, Administra-
tive, Professional, Outside Sales and Com-
puter Employees” shall cease to have any
force or effect.
H.R. 4773 retroactively relieves employ-
ers of any liability for failing to comply
with the updates to the FLSA for the period
of time between the final rule making deci-
sion of 80 F.R. 38515 and the date of enact-
ment of H.R. 4773. The Act further creates
a right of action for an employer to recoup
any payments made to the employee in
compliance with 80 F.R. 38515 prior to the
enactment of H.R. 4773. H.R. 4773 also
seeks to prohibit automatic updates to the
salary threshold for purposes of exemp-
tions to minimum wage and maximum
hour requirements under the FLSA. H.R.
4773 requires instead that the Department
of Labor issue a new rule through notice
and comment rulemaking for each change
in any salary threshold it proposes.
Human resources groups have come
out in support of H.R. 4773. One particu-
lar group, the Society for Human Resource
Management (SHRM), wrote a letter in
support on March 29, 2016. According
to SHRM, the minimum salary thresh-
old should rise. However, the proposed
increase will have a larger impact in the
non-profit sector, small businesses, and
in certain geographic areas. According to
SHRM, professional employees will be re-­
classified as non-exempt hourly employees
resulting in less workplace flexibility, forc-
ing employees to track their time closely,
and lead to wage compression. Another 340
organizations agreed and signed a letter
dated April 18, 2016, submitted by the Part-
nership to Protect Workplace Opportunity.
■
An important distinction
between the learned
professional exemption and
the administrator exemption is
that the learned professional
exemption is restricted to
professions where specialized
academic training is a
standard prerequisite for
entrance into the profession,
i.e., attorneys, physicians, etc.
■

4. 32 ■ In-House Defense Quarterly ■ Summer 2016
YOUNGLAWYERS
How Your Organization Can
Implement Overtime Changes
It’s unlikely that H.R. 4773 will be final-
ized prior to December 1, 2016. While im-
plementing changes in advance of the final
rule may not be advantageous, many steps
can be taken now to prepare for the transi-
tion.First,notifyseniormanagementofthe
anticipatedrulechangesandbeginapayroll
audittoidentifyemployeeswhowillfallbe-
low the new minimum salary threshold of
$47,476. Next, coordinate with operations,
human resources and the finance depart-
ment to review actual job duties against job
descriptions and the FLSA exemption cri-
teria. Keep a careful eye on people in entry
level management positions, such as retail
assistant managers. Kohl’s recently settled
overtime claims due to an alleged misclas-
sification of these employees as exempt.
Costello v. Kohl’s Ill., Inc. 13-CV-1359, Or-
derGratingSettlement(S.D.N.Y.Jan7,2016).
Other retailers including Dick’s, PetSmart,
andT.J.Maxxhavealsobeenaccusedofmis-
classifyingemployeestoavoidovertimepay.
Once the affected roles and employees
havebeenidentified,preparefinancialmod-
els of the possible scenarios to determine
how moving an exempt employee to a non-
exempt position will impact the business’s
budget.Thereareacoupleofoptions.Abusi-
ness can raise salaried employees’ pay to
meet the minimum anticipated thresholds
toretainexemptstatusorconverttheseem-
ployees to hourly workers. When calculat-
ing salaries, be mindful of bonuses and the
EEOCpaybands.Asstated,theDepartment
ofLaborisconsideringtheinclusionofnon-
discretionarybonusestosatisfyaportionof
the standard salary level test requirement,
but no specific regulatory change has been
proposed. The EEOC is increasing efforts to
collect pay data via its EEO-1 report, which
contains twelve pay bands.
Finally, come up with a plan for imple-
mentation. Before changes are commu-
nicated to employees, consult human
resources, the payroll department and
information technology (IT) profession-
als to insure administrative functions are
ready to roll out. With respect to technol-
ogy, make sure your time tracking sys-
tems are up-to-date. Norman v. Dell, No.
07-6028-TC, 2008 WL 2899722 (D. Or.
July 10, 2008) demonstrated that glitches
in time-­tracking software will not pro-
tect an employer from a class action for
unpaid overtime. For those employees
whose job responsibilities will be chang-
ing, human resources will need to be pre-
pared to explain and enforce the new roles.
For those who are moving from exempt to
non-exempt hourly status, the necessity for
tracking hours, such as a traditional time
clock, may affect how these employees feel
about their role.
Proposed Changes to EEO-1 Reports
Include Pay Data Collection
Accuratelytrackingemployeehoursisofin-
creasing importance. On January 29, 2016,
the Equal Employment Opportunity Com-
mission (EEOC) proposed a rule revising
the Employer Information Report (EEO-1)
toincludeW-2payrangesandhoursworked
beginning on September 30, 2017. These re-
quirements will come in addition to the al-
ready required fields of race, ethnicity, sex,
and job category. If passed, the proposed
rule would provide greater insight to the
pay structures, as well as pay disparities in
organizations.TheEEOCstatesthatitplans
to use this data to improve enforcement of
federalpaydiscriminationlawsandsupport
employers’voluntarycompliancewiththose
laws. The EEOC further states that it plans
to work closely with the Department of La-
bor and the Department of Justice to coor-
dinate an interagency approach on the use
of pay data in enforcement efforts.
Private employers as well as federal con-
tractors with 100 or more employees will be
required to comply with the new reporting
requirements should they pass. The EEO-1
reports will seek the number of employ-
ees whose W-2 earnings for the prior 12
month period fell within each of twelve pay
bands. The twelve pay bands track the pay
bands used by the Bureau of Labor Statis-
tics survey. The hours worked component
seems to be of particular importance to the
new EEO-1 because it will be the means
by which part-time and/or partial year
employment is considered.
Private employers with 99 employees or
fewer that are not federal contractors will
not be required to file an EEO-1 report. The
same can be said for federal contractors
with 49 or fewer employees. Federal con-
tractors with 50-99 employees will still file
their EEO-1 report, but are exempt from
supplying pay data.
The employer already bears the bur-
den of maintaining accurate time records
under the FLSA. 29 U.S.C.A. §211(c)(West
2016). According to the EEOC, employ-
ers can expect to incur a one-time cost to
develop new queries in its existing human
resources information system to comply
with the proposed update.
Conclusion
Based on the foregoing, federally dictated
changes to employee compensation along
with greater transparency in pay structures
are coming. The comment periods for the
proposed pay data collection portion to the
EEO-1 report has passed. When the final
rulemaking decision from the Department
of Labor becomes effective, the minimum
salary threshold may very well be fixed to
the CPI-U. Much like a variable interest
rate that fluctuates every quarter, the min-
imum cost of labor may fluctuate every
three years based on the data collected by
the Bureau of Labor statistics when deter-
mining the CPI-U. If the EEOC’s proposed
rule passes, employers with 100 or more
employees will provide employment data
in accordance with the same pay bands
the Bureau of Labor statistics utilizes in
their annual survey. In short, the Bureau
of Labor statistics will have the capacity to
adjust threshold salaries relative to the cost
of necessities in an urban environment.
H.R. 4773 provides a means by which
the efforts of the FLSA can be unwound.
Given that this is an election year, it is dif-
ficult to predict whether this proposed
rule will become law. Regardless, the best
course of action is to prepare to comply
with the FLSA’s new mandates now.
■
Federally dictated changes to
employee compensation along
with greater transparency in
pay structures are coming.
■