The New FLSA Salary Basis Test Regulations Are Here! – Everything California Private Schools Need To Know!

Category: Special Bulletins
Date: May 19, 2016 07:59 PM
The New FLSA Salary Basis Test Regulations Are Here! – Everything California Private Schools Need To Know!

On May 18, 2016, the U.S. Department of Labor ("DOL") issued new regulations modifying the weekly salary and annual compensation threshold levels for white collar exemptions to FLSA overtime requirements.  These regulations become effective December 1, 2016.  The new FLSA regulations will not have any impact on the overtime-exempt status of teachers at private schools, but will impact other overtime exempt positions such as administrators, deans, and managers.   It is critical for schools to become familiar with these new regulations, among other reasons because violations of overtime requirements are costly mistakes. 

What Are The New Key Provisions?

The newly published FLSA regulations that become effective December 1, 2016 make the following changes:

  1. The weekly salary threshold level is more than doubled from $455 per week ($23,660 annually) to $913 per week (equivalent to $47,476 annually);

  2. The total compensation needed to exempt highly compensated employees is increased from $100,000 annually to $134,004 annually; 

  3. There is now a mechanism that automatically updates these salary and compensation levels every three years, beginning January 1, 2020; and

  4. Employers are now able to use nondiscretionary bonuses and incentive payments made on a quarterly or more frequent basis to satisfy up to 10 percent of the new standard salary level.

However, the new FLSA regulations do not make any changes to the FLSA Duties Tests that are also generally needed to qualify for the FLSA overtime exemptions.

Below is a comparison of the current and new FLSA Salary Basis Test:

 

2004 FLSA regulation
(can be found
here)

NEW 2016 FLSA regulation - effective December 1, 2016 (can be found here)

Minimum Weekly Salary for Executive, Administrative and Professional Employees

 

At least $455 per week (or $23,660 annually)

At least $913 per week (or $47,476 annually)

Minimum Weekly Salary for School Administrative Employees Performing Functions Related to Academic Instruction or Training

 

At least $455 per week (equivalent to $23,660 annually), or salary equal to the entrance salary for teachers at the school

At least $913 per week (equivalent to $47,476 annually), or salary equal to the entrance salary for teachers at the school

Minimum Annual Compensation for Highly Compensated Employees

 

At least $100,000 annually

At least $134,004 annually

Automatic updating  mechanism

None

Salary and compensation levels will be automatically updated every three years, beginning on January 1, 2020.

 

 

Inclusion of Nondiscretionary bonuses and incentive payments

Permits nondiscretionary bonuses and incentive payments (including commissions) to count toward the total annual compensation requirement.

To go towards the standard salary level test, payments of nondiscretionary bonuses and incentive payments must be paid on a quarterly or more frequent basis; the amount is capped at 10 percent of the required salary level amount; and the employer may make a "catch-up" payment.



Impact On California Private Schools?

Generally, private schools are subject to both federal and state wage and hour laws.  For example, California currently imposes a minimum wage of $10 per hour which is higher than the federal FLSA minimum wage of $7.25 per hour.  Schools must insure that an employee who is treated as exempt from overtime meets both the FLSA and the California tests for overtime exemption. (Industrial Welfare Commission Wage Order No. 4-2001, section 4.C.

A significant exception applies to "ministerial" employees at religious schools.  For those employees who serve in a religious capacity – who are ministers as a matter of law – the FLSA and state wage and hour laws will not apply.  Teachers at religious schools, for example, may qualify as ministers.  (Hosanna-Tabor Evangelical Lutheran Church and School v. EEOC (2012)).  The California Court of Appeal has recognized preschool teachers as ministers.  (Henry v. Red Hill Evangelical Lutheran Church of Tustin (2011)).  The Ninth Circuit has applied this exception specifically to state wage and hour claims.  (Alcazar v. The Corporation of the Catholic Archbishop of Seattle (2010)). 

1. Teachers Are Only Subject to California's Salary Basis Test, not the FLSA Salary Test.

Under the FLSA, full-time teachers, part-time teachers, and teaching assistants are exempt from overtime requirements because the definition of teaching is quite broad and there is no salary basis test for the teacher exemption. (29 C.F.R. sec. 541.303, Teachers) 

In contrast, under the California Labor Code, teachers at private schools must meet specific requirements to be exempt from overtime, including California's salary basis test, which requires that they earn "a monthly salary equivalent to no less than two times the state minimum wage for full-time employment", with full-employment defined as 40 hours per week. (California Labor Code, sec. 515.8) The salary basis is currently $800 per week, $3,467 per month, or $41,600 annually based upon the current minimum wage of $10 per hour.  However, on January 1, 2017, the California minimum wage increases to $10.50 per hour, and it increases annually each year through 2022.  Therefore, as of January 1, 2017, the minimum salary to be exempt under California law will increase to $840 per week, $3,640 per month, or $43,680 annually.  The FLSA does not require teachers to meet a minimum salary to be exempt.  Since the FLSA salary basis test does not apply to teachers, the amendment to the FLSA regulations has no impact on private school teachers in California.  Private school teachers still must earn at least twice the California minimum wage to be exempt.

Additionally, teaching assistants, tutors, instructional aides, vocational instructors and other similar positions are not exempt from California overtime laws and must still be considered non-exempt employees in accordance with California law.

2. Non-Teachers At Private Schools Must Meet Both the FLSA and California Salary Requirements To Be Exempt From Overtime.

a. Salary Requirement For Executive, Administrative and Professional Employees.

Overtime exempt employees other than teachers working at private schools, such as administrators, deans, managers, and supervisors may be impacted by the new FLSA salary basis test since the new FLSA salary basis test of $913 per week will be greater than the California salary basis test of $800 per week in 2016 and $840 per week in 2017.  Exempt administrators, managers and supervisors who are not directly involved in academic instruction or training will have to meet the new FLSA salary basis test of $913 per week to be exempt.  Common examples of those positions at schools would be the chief business officer, the director of development, and the director of operations or facilities.   There is also a revision to the FLSA salary basis test to $913 per week for computer employees.  However, the minimum salary for California's computer software employee exemption ($41.85 per hour or $87,048 annually) still far exceeds that amount, so private schools must continue to follow California law for computer software employees. (California Labor Code, sec. 515.5, subd. (a)(4))

b. Salary Requirement For Administrative Employees Who Perform Functions Related to Academic Instruction or Training.

The FLSA contains a separate salary test for those school employees whose primary duties are administrative functions relating to academic instruction or training (as opposed to general business operations of the school).  Common examples of those positions at schools are a dean of students, a director of curriculum, and a director of college admissions.  The FLSA salary requirement is the lower of:  $913/week, or the minimum entrance salary for full-time teachers at the school.  To determine if these employees may be exempt, a school should first examine its entrance salary for full-time teachers.  If that salary is less than $800 per week ($840 per week as of January 1, 2017), then California's salary basis test of $800/$840 per week will apply to the administrative academic employees.  If that salary is greater than $800/$840 per week but less than $913 per week, then the minimum entrance salary for teachers will be the minimum salary for administrative academic employees.  If that salary is greater than $913 per week, then the minimum salary for administrative academic employees will be $913 per week.

c. Schools Can Make Quarterly "Catch-Up" Payments to Ensure Exempt Employees Meet the Salary Basis Test.

A new provision in the regulations is the ability for schools to make a "catch-up" payment to bring an employee up to the minimum salary level required for exempt status.  If the employee does not earn at least $913 per week, the school may make a "catch-up" payment once a quarter (13 week period) to bring the employee's salary up to $913 per week for the quarter, provided the catch-up payment is no more than 10% of the salary level for the quarter (i.e. $1,186.90 for the quarter.)

d. California Private Schools Will Not Be Able To Utilize The FLSA's Highly Compensated Employee Exemption.

Although the FLSA contains a highly compensated employee exemption for employees earning over $134,004, no such exemption exists under California law.  Thus, private schools cannot utilize the FLSA's highly compensated employee exemption, as private schools are also covered by California law.

The salary requirement is only half of the test for an employee to be exempt – the employee must also perform exempt job duties.  The new FLSA regulations do not modify the job duty requirements.  Since California job duty requirements for exempt status continue to be stricter than the FLSA job duty requirements, schools must continue to insure that their overtime-exempt employees meet California's duties tests for the executive, administrative and professional exemptions.

What Are The Next Steps?

Given the new salary-basis threshold, private schools should determine which non-teacher positions are affected by these new regulations.  Schools should evaluate whether to convert the affected positions to nonexempt status or whether to increase compensation levels to maintain the exempt status, either permanently or by making a quarterly "catch-up" payment.  Schools should also keep in mind that California's salary basis test will continue to rise each year to $840 on January 1, 2017, $880 on January 1, 2018, and to $960 on January 1, 2019, surpassing the FLSA salary basis test.  However, the FLSA regulations provide for an adjustment of the FLSA salary basis test every three years, so the FLSA salary basis could adjust upwards on January 1, 2020.

This confusing annual race between the California and federal salary basis requirements will force schools to pay close attention to the minimum salary required for exempt status for each school year.  Complicating matters further, the minimum salary for exempt status will typically change in the middle of the school year.  Thus, a school must consider the impact of the mid-year adjustment in the salary basis when the school is preparing its contracts for the following school year.

If an impacted position will be converted to nonexempt status, the school should give notice to the affected employee about the reclassification, provide the employee with training on timekeeping and overtime policies and procedures, and implement any necessary changes to the payroll system.  The school must ensure that the new nonexempt employee accurately reports work hours, including meal breaks, and complies with the school's overtime policies and procedures.  This is critical because the FLSA and California law impose an affirmative obligation on employers to keep accurate time records, and require prompt payment of wages, including overtime.  Without accurate time and payroll records, the school may face liability for liquidated damages (twice the amount of compensation due) if an FLSA lawsuit is filed alleging overtime claims.

The new regulations will have minimal impact for some schools who were already paying their teachers a salary of more than twice the California minimum wage and whose other overtime-exempt employees all already earn at least $913 per week.   Still, even if the private school is not significantly affected by these new regulations, this is an opportune time to assess whether current exempt positions perform the appropriate duties for the executive, administrative, or professional exemption (duties test) and implement necessary changes before the regulations take effect in the next school year.

Checklist:

  1. Determine which non-teacher positions that are classified as exempt from overtime earn less than $913 per week;

  2. Determine whether those positions will remain overtime exempt or be reclassified as nonexempt under FLSA;

  3. Audit the duties of other overtime-exempt positions to ensure that they meet the California (and the FLSA) duties tests.

  4. If maintaining overtime exempt status:

    • Determine the amount of salary increase required;

    • Evaluate whether the contract needs to be revised;

    • Implement payroll system changes; and

    • Provide accurate and timely payments at the new salary level.

  5. If converting to nonexempt status:

    • Give notice to affected employee;

    • Evaluate whether the contract needs to be revised;

    • Provide affected employee with training on timekeeping procedures, including recording all hours worked, meal breaks and working overtime;

    • Implement payroll system changes; and

    • Provide accurate and timely payment of wages, including overtime.

Note:

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