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Sometime next year, the federal regulations governing overtime are probably going to change.  The U.S. Department of Labor has proposed a significant increase to the minimum salary you will have to pay an employee in order for them to qualify as an executive or administrative employee.  The employee’s salary rate is the threshold consideration of whether the employee can be considered exempt from overtime.

If this sounds familiar, that’s because businesses went through the same process in 2016 under the Obama administration.  A federal court ruling, a presidential election and the appointment of a new U.S. Secretary of Labor kept the rule from ultimately going into effect, but it looks like there will be no such luck this time around.

“The time has come for employers to dust off the review of their pay schedules and exemption classifications that they may have started in 2016,” says attorney Michael A. Shadiack, who chairs the Employment Law Group at Connell Foley in Roseland.

Michael Shadiack

Attorney Michael Shadiack of Connell Foley.

The good news is the minimum salary won’t be as high as the Obama administration tried to impose. The current proposal would put it at $684* per week, or $35,568* per year, instead of the $973 per week minimum employers were facing in 2016.  Current regulations set the minimum weekly salary requirement at $455.

But Shadiack notes that salary alone is not enough to qualify as exempt.  For an employee to be exempt he/she must: (1) be paid on a salary basis, (2) the salary must meet the threshold set forth in the regulations (as discussed above), and (3) the employee’s job duties must be analyzed to determine if they meet the “duties test” set forth in the regulations for the specific exemption.  The third factor requires an analysis of the employee’s job description where the essential duties of the job should be detailed.

The executive and the administrative exemptions are two of the “white collar” exemptions recognized under federal and New Jersey law. “Just because you pay an employee a salary does not mean they are exempt from overtime,” Shadiack said. “You must pay them the minimum salary, and they must perform work duties to establish they may be considered exempt under the executive or administrative exemption.”

As to the executive exemption, “the employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise,” Shadiack explained recently. “An exempt employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent, and must have the authority to hire or fire other employees, or at least have weight given to their recommendations.”

Legally speaking, “primary duty” means the principal, main, major or most important duty that the employee performs, Shadiack said. Determination of an employee’s primary duty should be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole. This would involve directing employees’ work, handling their complaints and recommending them for promotions or other changes, among other considerations.

As for the “customarily and regularly” requirement, the regulations provide the employee must perform the primary duty “more often than occasionally but not constantly.”  It includes work normally done every workweek, but does not include isolated or one-time tasks,” Shadiack explained.

The administrative exemption has similar requirements. The employee’s primary duty must be 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, and “include the exercise of discretion and independent judgment with respect to matters of significance,” Shadiack said.  A few examples of job duties that could fit within the administrative exemption include accounting, public relations, and human resources.

The U.S. Department of Labor anticipates that the new salary threshold may go into effect by early 2020.   To get prepared to comply with these new changes for employees who are presently classified as exempt but earn less than $35,568 per year, Shadiack recommends that employers begin considering having to reclassify those employees as hourly non-exempt and pay them for and/or limit their overtime; or be prepared to raise their salary above the new threshold when and if it goes into effect.

*When this article was first published, DOL had proposed a salary threshold of $679 per week or $35,308 per year. NJBIA updated this article Sept. 24 to reflect the final salary levels that will go into effect Jan. 1.