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UNDERSTANDING THE NEW OVERTIME REGULATIONS

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UNDERSTANDING THE NEW OVERTIME REGULATIONS

By Amy J. Traub and Adam R. Seldon

The U.S. Department of Labor (“DOL”) issued the final version of the much-anticipated new Fair Labor Standards Act (“FLSA”) regulations regarding the salary threshold for exempt employees. The following  provides employers with insight into how to understand, and ultimately apply, the new regulations, which will affect employers of all sizes in all industries across the country.

History of the New Overtime Regulations

The FLSA provides an exemption from the overtime pay requirement for workers employed as executive, administrative, and professional employees (“exempt white-collar employees”). The FLSA also exempts from overtime pay highly compensated employees (“HCEs”).

To be exempt, an employee must meet three criteria: (a) the employee must be paid on a predetermined “salary basis” (i.e., the employee’s predetermined salary cannot be reduced because of variations in the quality or quantity of work performed); (b) the employee’s salary must meet a minimum salary threshold (currently $455 per week; i.e., $23,660 per year); and (c) the employee must meet the “duties” test of the applicable exemption (i.e., the employee must perform certain white-collar job duties).
On March 13, 2014, President Barack Obama signed a memorandum directing the DOL to update the FLSA’s overtime regulations governing exempt white-collar employees. On July 6, 2015, the DOL announced the much-anticipated proposed regulations, which, among other things, more than doubled the salary threshold required for an employee to qualify as an exempt white-collar employee. In July, we advised that the proposed overtime regulations would have a significant impact on all industries and that employers should analyze their current workforce and anticipate where changes should be made rather than wait for the proposed overtime regulations to be finalized.

The DOL received more than 270,000 comments regarding the proposed overtime regulations, and on March 15, 2016, the DOL sent the proposed overtime regulations to the Office of Management and Budget (“OMB”).

The Final Rules Are Here

At long last, on May 18, 2016, the DOL released the final overtime regulations, which will become effective in 200 days (i.e., on December 1, 2016). The final overtime regulations:

  • increase the exempt white-collar employee salary threshold from $455 per week (i.e., $23,660 per year) to $913 per week (i.e., $47,476 per year);
  • increase the annual compensation requirement for HCEs from $100,000 to $134,004;
  • require that the salary thresholds automatically update every three years (the salary threshold for exempt white-collar employees will be set at the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region {currently the South}; the annual compensation requirement for HCEs will be set at the 90th percentile of earnings for full-time salaried workers nationally); and
  • amend the salary basis test allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold for exempt white-collar employees.

While the final overtime regulations double the salary threshold required for an employee to qualify as an exempt white-collar employee, the threshold is approximately $3,000 less than the proposed threshold that was sent to the OMB in July. Moreover, in contrast to the proposed regulations, the final overtime regulations will not require that the above-mentioned salary thresholds increase annually, which could have been a compliance headache for employers year after year. Instead, the salary thresholds will increase every three years, beginning on January 1, 2020. These minor compromised positions on the part of the DOL likely reflect the pushback Congress received from employers and management-side lawyers regarding the new overtime regulations and their failure to take into account that a nationwide salary threshold may be inflexible and illogical for certain industries and regions.

The Time to Act Is Now

On December 1, 2016, employees earning less than $47,476 will no longer be eligible for a white-collar exemption to the FLSA’s overtime pay requirements. In addition, employees who earn less than $134,004 can no longer qualify as exempt HCEs. Importantly, the final regulations do not provide any relief or exemption for small businesses, nonprofit organizations, or higher education institutions, which, like all other employers, will now be burdened with having to reclassify employees or provide raises to administrative and executive employees.1

To the extent employers have not otherwise prepared for the final overtime regulations, they should begin to do so immediately. Employers should start by identifying all employees currently classified as exempt under one of the white-collar exemptions. They should then determine what changes, if any, need to be made with respect to each affected employee. While the new regulations do not make any changes to the various “duties” tests under the FLSA, we recommend that employers take this opportunity to do a full-scale audit of their exempt classifications, analyzing the duties each worker performs, along with his or her current compensation structure. Indeed, as set forth above, an employee can be exempt only if he/she meets all three criteria for exemption – the salary basis test, the salary threshold test, and the duties test. Thus, currently exempt employees should be reviewed from all three standpoints to ensure proper application of an exemption. In fact, if/when the DOL begins enforcing its new regulations, employers can expect a thorough three-point review – not a determination based just on the salary threshold – of exempt employees, so it is imperative to shore up exemptions.

Employers also need to ensure that they take into account all forms of compensation that employees receive when conducting their exemption analysis. The new overtime regulations allow employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new salary threshold for exempt white-collar employees; however, such payments must be made on a quarterly or more frequent basis. While nondiscretionary bonuses and incentive payments may be used to satisfy up to 10 percent of the new salary threshold, employers must carefully consider whether such forms of compensation are truly “nondiscretionary.” If an employer improperly determines that a discretionary bonus is nondiscretionary and the employee does not otherwise earn the requisite salary threshold, the employee cannot be classified as an exempt white-collar employee. Employers should also take into account the employee benefits that exempt employees receive and whether any changes to benefit eligibility need to be made in light of the new overtime regulations.

Is There a Magic Formula to Address the New Changes?

Importantly, there is no “one size fits all” solution to the new overtime regulations. While employers could simply reclassify each affected worker as “nonexempt hourly,” this may not be the recommended course of action, depending upon a number of factors, including not only budgetary concerns but also such considerations as (a) the amount of anticipated overtime for those employees and whether that amount can feasibly be controlled; (b) the culture of the employer’s organization; (c) employee morale and how a change from being an exempt employee to punching a clock could be perceived; and (d) what actions competitor companies within the employer’s industry will take regarding the new regulations and whether those actions could affect employee retention.

Other potential options apart from reclassifying employees as nonexempt hourly include meeting the new salary threshold to keep employees exempt, taking advantage of the fluctuating workweek methodology of paying overtime (where appropriate and lawful), limiting working hours to 40 per workweek, and other strategic options. Employers should understand that certain solutions may work best for some positions and/or locations but not for others, so a case-by-case analysis is recommended.

Employers, however, should understand that if they do simply reclassify workers as nonexempt hourly, it may not be as simple as dividing the employee’s current salary by 52 weeks and then by 40 (or some other regularly worked number of) hours, as this formula may – and often will – inadvertently provide the employee with additional compensation. Before an employer decides to reclassify workers as nonexempt hourly, there are multiple other mathematical formulas to consider in terms of reverse engineering a currently exempt employee’s annual salary into an hourly rate. Employers should also be mindful of the fact that being reclassified as nonexempt will also trigger other FLSA-required payments, including for time spent traveling, training, and responding to/drafting work-related e-mails and text messages outside the office.

Significantly, the vast majority of employers faced with tackling the new regulations will likely be faced with the additional challenge of not knowing exactly (or even approximately) how many hours their affected workers may typically be working, since exempt employees are not required to record their time, which may lead to further budgeting issues if an employer underestimates the amount of overtime these employees will work in the year ahead. As a best practice, employers should consider requiring potentially affected employees to record their hours during the 200-day compliance period so the employer can better assess whether the employees will work overtime in the year ahead and, ultimately, determine the best strategy for applying the new regulations to those workers.

Takeaway

The clock is ticking, as employers have only 200 days to comply with the new regulations. Given the DOL’s concerted efforts to increase overtime eligibility, it should come as no surprise that enforcement efforts will follow shortly. Therefore, the time to analyze your workforce and prepare for the salary threshold changes is now. The decision is a personal one that depends on a multitude of factors relevant to the organization at issue, and it should not be taken lightly.

Business

Euro zone business activity shrank in January as lockdowns hit services

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Euro zone business activity shrank in January as lockdowns hit services 1

By Jonathan Cable

LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.

With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.

“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.

“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”

The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]

A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.

With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.

That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.

Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.

An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.

But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.

As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.

“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.

(Reporting by Jonathan Cable; Editing by Toby Chopra)

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Volkswagen’s profit halves, but deliveries recovering

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Volkswagen's profit halves, but deliveries recovering 2

BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.

The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.

Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.

“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.

Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.

Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.

Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.

It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.

Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.

The group is expected to release detailed 2020 figures on March 16.

($1 = 0.8215 euros)

(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)

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Global chip shortage hits China’s bitcoin mining sector

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Global chip shortage hits China's bitcoin mining sector 3

By Samuel Shen and Alun John

SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.

The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.

Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.

Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.

“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.

Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.

Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.

The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.

Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.

“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”

CONSOLIDATION

Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”

“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.

Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.

A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.

“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.

The cryptocurrency surge is affecting who is able to mine.

The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.

“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.

Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.

“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.

Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.

(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)

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