Got Outside Sales Personnel? You Have a Chance to Tell the Labor Department When You Should be Required to Pay Them Overtime

The Labor Department is seeking comments on an overtime rule – one that affects overtime payments to outside sales personnel and to administrative and executive personnel.  This is a rule that could dramatically change the pay structure of certain distributors, and is worth the attention of ASA members.

Background

The Fair Labor Standards Act (FLSA) generally requires covered employers to pay their employees overtime premium pay of not less than one and one-half times the employee’s regular rate of pay for any hours worked over 40 in a workweek. But there is an important exception that exempts “any employee employed in a bona fide executive, administrative, or professional capacity … or in the capacity of outside salesman ….”  These perosnnel are known as “exempt” personnel, and they are not subject to the FLSA protections.  Thus, outside sales personnel do not have to be paid overtime.  This allows outside sales personnel to be paid based on productivity rather than hours of effort (e.g. commission) where that compensation mechanism is appropriate.

The Issue

In May 2016, the Labor Department under President Obama issued a new rule that would extend overtime benefits to many employees who did not previously enjoy those benefits.  The Administration had bragged that this will automatically extend overtime pay protections to over 4 million workers who did not previously have this entitlement.

The Obama Administration proposed to add new tests that would have extended overtime pay to many categories of personnel (including outside sale personnel).  The new tests included a salary-level test and an automatic updating mechanism which would have extended the standards found in FLSA.  In November, a Federal Court stopped the rule from being implemented.  The Court concluded that the overtime exemption statute (29 U.S.C. § 213(a)(1)) was plain in its language, and did not permit the Department of Labor to add tests that undermined those exemptions.

The Trump Administration has pledged to dismantle many of the programs established by the Obama Administration, and this is the next one to potentially face the chopping block.

What Now?

On February 24, 2017, President Donald Trump signed Executive Order 13777, “Enforcing the Regulatory Reform Agenda,”  that directed federal agencies to identify regulations for repeal, replacement, or modification.

The overtime rule has been enjoined from enforcement, but it is still on the books.  It makes sense to revoke it, consistent with the  Executive Order.  But you cannot just waive a magic wand and be rid of a regulation – it must be rescinded using the same Administrative Procedures Act process that was used to enact it.  The Department of Labor has potentially started this process.

The Department of Labor has put out a request for information in which they are seeking comments on the overtime provision.  The call for comments includes a list of questions, but any comments on the overtime provisions are welcome.  The list of questions includes questions about reforming the overtime provisions in order to make them acceptable.

Written comments should be sent to the Department on or before September 25, 2017.  Please let ASA know your concerns, as well, so our comments can reflect your concerns.

New Overtime Rules May Affect ASA Members and their Personnel

On Monday, the federal government will publish a new rule updating the overtime regulations.

The Administration has bragged that this will automatically extend overtime pay protections to over 4 million workers who did not previously have this entitlement.

The overtime rules typically require that employees who work more than 40 hours in a week be compensated at ‘time-and-a-half’ for hours beyond the first 40.  The overtime rules also provide ‘exempt‘ categories. These are categories of employees who are not entitled to ‘time-and-a-half’ for hours beyond the first 40. Exemptions can be based on salary (e.g. the exemption for highly compensated employees – see below).  They can also be based on job function (there are exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees).

Key Provisions of the Final Rule

The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt.  Specifically, the Final Rule:

  1. Sets the “standard salary level” at $913 per week; $47,476 annually for a full-year worker – employees below this threshold will automatically be eligible for overtime, unless another exemption applies;
  2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004) – employees above this level may not be eligible for overtime for weekly hours worked over 40;
  3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to keep them consistent with wage inflation; and
  4. Amends the salary basis test to allow employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level [so an employer could pay 90% of the minimum in straight salary and the other 10% in commissions to meet the salary threshold].

Outside Sales Exemption

Many ASA members employ outside sales personnel.  There is a special exemption for these employees (they may not be entitled to ‘time-and-a-half’ for hours beyond the first 40).

To qualify for the outside sales employee exemption, all of the following tests must be met:

  • 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 consideration will be paid by the client or customer; and
  • The employee must be customarily and regularly engaged away from the employer’s place or places of business.

There is no minimum nor maximum salary requirements for the outside sales exemption.

Administrative Personnel Exemption

Many ASA members employ administrative personnel.  There is a special exemption for administrative employees (they may not be entitled to ‘time-and-a-half’ for hours beyond the first 40 if they meet the requirements).

Job title is never dispositive of whether an exemption applies. The Department of Labor always looks at the real tasks performed by the employee.

To qualify for the administrative exemption, an employee:

  • Must receive at least $913 a week (the equivalent of $47,476 a year) on a salary or fee basis.  29 CFR 541.200(a)(1).
  • Must have as a primary duty 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. 29 CFR 541.200(a)(2).
  • Must have duties that include the exercise of discretion and independent judgment with respect to matters of significance.  29 CFR 541.200(a)(3).

For example, an executive assistant or administrative assistant to a business owner generally meets the duties requirements for the administrative exemption if such employee, without specific instructions or prescribed procedures, has been delegated authority regarding matters of significance.  29 C.F.R. 541.203(d).  On the other hand, ordinary inspection work generally does not meet the duties requirements for the administrative exemption, because inspectors normally perform specialized work along standardized lines involving well-established techniques and procedures which may have been catalogued and described in manuals or other sources. 29 C.F.R. 541.203(g).

Executive Exemption

To successfully run a business, you must employ executive personnel.  There is a special exemption for executive employees (they may not be entitled to ‘time-and-a-half’ for hours beyond the first 40 if they meet the requirements).

To qualify for the executive exemption, an employee must:

  • Receive compensation on a salary basis of not less than $913 per week (the equivalent of $47,476 a year);  29 C.F.R. 541.100(a)(1).
  • Have a primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;  29 C.F.R. 541.100(a)(2).
  • Customarily and regularly direct the work of at least two other full-time employees or their equivalent (for example, one full-time and two half-time employees are equivalent to two full-time employees);  29 C.F.R. 541.100(a)(3).
  • Have the authority to hire or fire other employees, or must be able to make recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees (and which recommendations must be given particular weight).  29 C.F.R. 541.100(a)(4).

Under the regulations, “management” includes, but is not limited to, activities such as

  • interviewing, selecting, and training of employees;
  • setting and adjusting their rates of pay and hours of work;
  • directing the work of employees;
  • maintaining production or sales records for use in supervision or control;
  • appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status;
  • handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used;
  • apportioning the work among the employees;
  • determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold;
  • controlling the flow and distribution of materials or merchandise and supplies;
  • providing for the safety and security of the employees or the property;
  • planning and controlling the budget; and
  • monitoring or implementing legal compliance measures.  29 C.F.R. 541.102.

Computer Personnel Exemption

With the rising importance of IT in the aviation sphere, many ASA members employ computer personnel.  There is a special exemption for computer employees (they may not be entitled to ‘time-and-a-half’ for hours beyond the first 40 if they meet the requirements).

To qualify for the computer exemption, an employee must receive compensation on a salary basis of not less than $913 per week (the equivalent of $47,476 a year);  29 C.F.R. 541.400(b). In addition, the exemptions apply only to computer employees whose primary duties consists of:

    • The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
    • The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
    • The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
    • A combination of the above three duties.

29 C.F.R. 541.400(b)(1-4).

Implementation

The effective date of the final rule is expected to be December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

The final rule will be published on Monday, so of course some changes are theoretically possible over the weekend.

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