FOR AN EMPLOYEE to be exempt from overtime compensation, three requirements must be satisfied:
- He must be paid on a salary basis, and
- He must earn a minimum amount of salary each week, and
- He must meet the appropriate primary duties test covering “white collar” employees.
In May, the Department of Labor (DOL) finally released its new Overtime Exemption Rule. Under the rule, the three requirements stated above have not changed. However, there is little doubt that many currently exempt employees will soon either be entitled to overtime pay or will see their hours reduced to ensure they do not work more than 40 hours per week. Either way, this new rule will have a significant impact on private clubs, their employees and their members.
Thankfully, the rule does not go into effect until Dec. 1, 2016. Regrettably, there is little that Congress or the courts will be able to do to stop its implementation. As such, club leaders must prepare for its effects.
The Specifics of the New Rule
Under DOL’s new rule, the minimum weekly salary threshold for an exempt employee will increase from $455 ($23,660 per year) to $913 ($47,476 per year). This means that any salaried club employee must make at least $913 per week before he could be considered exempt from overtime pay.
The rule allows up to 10 percent of that minimum weekly salary amount to be satisfied by commission income. Thus, a club’s head golf pro could be paid $822 per week ($42,744 per year) and the remaining $91 could be made up through lesson income. This would allow him to reach the $913 threshold and, as long as he meets the primary duties test, he would be exempt from overtime pay.
In addition, the rule changes the Highly Compensated Employee (HCE) exemption yearly threshold from $100,000 to $134,004. To be eligible for this exemption, an employee must make at least $913 per week. The remaining amount may be made up through commissions or bonuses. Should his weekly and yearly total be as outlined, and he meets a minimal primary duties test, he will be exempt from overtime pay.
The new rule also establishes an automatic update to these salary thresholds every three years. The minimum weekly salary increase will be based on the 40th percentile of full-time salaried workers in the lowest wage region of the country, currently the South. The HCE threshold will be based on the 90th percentile of full-time salaried workers from the same region.
In a major concession, DOL’s new rule did not change the primary duties test for exemption. However, by not changing the primary duties test, DOL tacitly stressed the importance of ensuring all exempt employees satisfy the test before being labeled exempt from overtime.
The Primary Duties Test
To be exempt from overtime pay, an employee must be salaried, receive the new minimum weekly salary and satisfy the primary duties test for the appropriate “white collar” exemption. Under the law, there are three categories of “white collar” exemptions: the executive exemption, the administrative exemption and the professional exemption.
To satisfy the primary duties test for the executive exemption, three factors must be met:
- The employee’s primary duty must be to manage the club or a customarily recognized department or subdivision of the club, and
- He must customarily and regularly direct the work of two or more full-time employees (or their equivalents), and
- He must have hire, fire and promotion authority over those employees or have his recommendations given particular weight.
To satisfy the primary duties test for the administrative exemption, two factors must be met:
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management of the club, and
- He must be given the right to exercise his own discretion and independent judgment on matters of significance to the club.
To satisfy the primary duties test for the professional exemption, the employee’s primary duty must be performing work that requires:
- Advanced knowledge earned from specialized academic training in the fields of science, learning or law, or
- Artistic or creative endeavors, or
- Teaching in an academic institution.
The professional exemption will not be applicable for golf, tennis and fitness professionals. However, it could apply to a club’s accountants on staff.
In most cases, a club employee will have to fall under the “executive exemption” or “administrative exemption” to be exempt from overtime pay. Unfortunately, many clubs may not have applied these (or any) primary duties tests to their currently exempt employees—meaning those employees may not have been exempt from overtime compensation for some time and certainly will not be starting December 1.
Under DOL’s new rule, club leaders will need to be certain to apply the appropriate primary duties test to all employees before assuming those employees are truly exempt from overtime compensation. Clubs that fail to consider the primary duties test will likely find themselves in violation of this new rule and liable for fines, penalties and back pay.
The Rule’s Impact
Club leaders will need to determine which employees are currently exempt and whether they will be exempt starting Dec. 1, 2016. Naturally, an exempt employee making less than $47,476 will soon lose his exemption. A decision will then need to be made whether to bump that employee up to the new salary threshold, keep him at his current salary and pay overtime, or restructure his work hours to ensure he does not work more than 40 hours per week.
If that employee is given a raise, the next question is whether he meets the primary duties test for exemption. There will be no need to increase an employee’s salary if he is unable to meet the appropriate primary duties tests.
Indeed, whether an employee meets the primary duties test will be the most important question to ask for each exempt employee. Any employee who already makes more than $47,476 will still need to meet the primary duties test to be exempt, and some of those employees may not satisfy the test. If that is the case, the club may soon be required to pay overtime or be forced to adjust those employees’ schedules to avoid additional overtime costs.
The next concern will be how to deal with golf, tennis and fitness professionals who receive a small base salary and earn the rest of their money from lesson income. Since few of those employees will meet the primary duties test, they will soon be entitled to overtime pay—regardless of how much they may earn in lesson income. Club leaders will have to determine how best to pay these pros in a way that will allow overtime to be computed correctly or manage those pros’ hours so they do not work more than 40 hours per week.
Finally, club leaders will need to budget not only for higher employee wages but also for additional employment tax outlays reflecting their employees’ higher wages. Those costs, as well as administrative costs associated with tracking employee hours, may hold the biggest impact for clubs in the first few years of this rule.
When the president first began discussions regarding the current overtime exemption rules more than two years ago, NCA and our allies agreed that portions of the rule needed to be adjusted. But, with more than a 100 percent jump in that salary and the limited phase-in time for the new salary threshold, this rule will only serve to penalize the very workers it was created to help.
From now until December 1, club leaders will be forced to make difficult decisions regarding staffing levels, employee shifts and compensation packages. In an effort to minimize the increased financial burdens associated with this rule, many clubs may actually be forced to cut employee hours, which will impact professional advancement and opportunities for club staffers.
NCA conveyed these realities to DOL for the last year however, our comments were ignored. As always, NCA will continue to work with our allies on Capitol Hill to reduce the negative impact of this rule on club employees and employers. In the meantime, club leaders must prepare now to comply with the rule.
Brad D. Steele, Esq., is NCA’s vice president of government relations & general counsel. He can be reached at [email protected].