Founders Alert: New Rules Regarding Overtime Pay Exemptions

We want to alert you of an important labor law development that will affect how employers, including startup companies, classify and pay their employees. 

The United States Department of Labor (“DOL”) has issued updated rules under the Fair Labor Standards Act (“FLSA”). Among other things, these new rules raise the minimum salary thresholds for  a “white collar” employee to be exempt from overtime pay requirements under the FLSA. 

The FLSA requires that an employee be paid time and a half for all overtime (i.e., hours worked over 40 in a week). There are a number of exemptions from this requirement—the most frequently relied upon exemption being the “white collar exemption” that applies to executive, administrative, professional, computer and outside sales employees. 

Employees whose duties fall within the white collar exemption must be paid a minimum salary to be exempt under the FLSA. (There are certain employees who are not subject to the minimum salary requirement under the FLSA, including outside sales employees and business owners with at least a bona fide 20% vested equity interest in their employer who are actively engaged in management of the employer. However, state laws may differ.)

The DOL’s updated rules will more than double the minimum salary requirement, from an annual rate of $23,660 ($455 per week) to $47,476 ($913 per week). The new minimum salary is effective December 1, 2016 and will be updated every three years.

These new rules will require that certain existing employees either receive salary increases to meet the new minimum requirement or be reclassified to non-exempt status. If employees are reclassified to non-exempt status, employers should consider whether to retain salaried status while paying overtime when required or to convert employees to hourly pay. Founders should be aware that all non-exempt employees must be paid at least minimum wage.

Improper classification of employees as exempt and the failure to make required overtime payments can have serious consequences, including the requirement to make double or triple back payments, pay attorney’s fees, and potential personal liability for directors, officers, and executives. Accordingly, it is important that founders be aware of this important legal development and discuss how to comply with the FLSA’s requirements and related state laws with outside counsel.

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