On May 18, 2016, the U.S. Department of Labor issued its “Final Rule,” which expands the number of people eligible to receive overtime pay under the Fair Labor Standards Act. The change will take effect on December 1, 2016. As a result, club owners should begin to assess now how this new law could affect their business.
According to Jonathan M. Hill, general counsel for ClubReady, LLC, the FLSA requires that employees be paid a premium (i.e., time-and-a-half) for any hours worked in excess of 40 per workweek.
“In layman’s terms, we call this ‘overtime,’” said Hill. “The FLSA, however, specifically exempts certain types of employees from the overtime requirement. While there are several different types of exemptions, the most common are the ‘white collar’ exemptions affecting employees in administrative, executive or professional positions. Within the fitness industry, it’s been fairly common practice to classify general managers, fitness managers and club managers as exempt executive employees.”
Hill explained courts will follow a two-part test to determine if one or more of the white collar exemptions apply. According to Hill, the “salary basis test” is the first part of the analysis. “Does an employee’s salary meet or exceed the minimum statutory threshold?” he asked. “Assuming the salary box is checked, the ‘duties test’ comes next. Does the employee’s job duties qualify him or her for an exemption?
Here, Hill explains further what club owners should be aware of going forward.
CS: What should club owners know about the new Department of Labor changes to the salary basis test for FLSA exemptions?
JH: Depending on which exemption is being claimed (i.e., administrative, executive or professional), the “duties test” may involve looking at whether an employee manages or supervisor other employees, whether he or she actively takes part in running the business, whether they exercise discretion and independent judgment on significant matters, or whether performing the job requires advanced knowledge.
With this refresher, now for the change. The Final Rule adjusts the statutory minimum salary upward. It was $23,660 annually; now it’s $47,476 annually.
What’s interesting is the U.S. DOL tied the new salary basis test to the 40th percentile of all salaried employees in the lowest-wage region of the U.S., currently the South. Every three years, the minimum salary will adjust (presumably upward) to track this 40th percentile baseline. The first automatic update will take place on January 1, 2020.
CS: Is this a good or bad thing?
JH: I guess the answer to this depends on who you are. I would imagine employers see this as a bad thing — payroll costs will almost certainly go up. Employees, particularly those in middle management positions, I’m sure would welcome the opportunity to see a bump in their salary, or get paid a premium for any overtime hours.
CS: How do club owners know if this affects them?
JH: When looking at FLSA exemptions, the salary basis part of the test is clear-cut. Either you meet the minimum salary threshold, or you don’t. The duties part of the test — which remains unchanged under the new rule — can be far less clear. What job title your employees have is far less important than what duties they are actually carrying out on the ground. To know if the Final Rule affects you, I would recommend auditing your employee base to fully understand what positions you have, what duties each of those positions are expected to carry out, what each position gets paid, and make sure good policies are in place spelling it all out.
CS: If it does affect clubs, what exactly should they do to ensure they comply?
JH: It goes back to the tests: salary and duties. If, as an employer, you’re claiming an exemption, you need to be able to check the box on minimum salary. Then, assuming the salary basis test is met, you need to be able to show employees are actually carrying out the duties required by law for that particular exemption. The U.S. DOL puts out helpful “Fact Sheets,” which describe the duties requirements for the white collar exemptions, and others. Club owners should definitely use these Fact Sheets as a resource.
CS: What else should club owners know about this change?
JH: Three things. First, this change in the law is expected to extend overtime pay to an estimated 4.2 million workers, many in positions of middle management. This is according to U.S. DOL estimates. Second, under the new rule, non-discretionary bonuses and incentive payments (including commissions) can satisfy up to 10 percent of the new $47,476 salary threshold. This is different from the old rule. And third, I’ve only discussed the rule changes within the context of the white collar exemptions; but, the Final Rule also changed the salary threshold for highly compensated employees, from $100,000 to $134,004.
I’ll end with this. Legal issues related to wages and hours can be complicated, and the consequences for getting this stuff wrong can be pretty severe. Club owners would be smart to speak with an attorney or a trained HR professional about the specifics of their business.
