For many years, employers have not been required to pay overtime to certain executive, administrative, and professional (“white collar”) employees because those employees have been treated as exempt from the overtime pay requirements of the federal Fair Labor Standards Act (“FLSA”). In May of 2016, the Department of Labor announced the publication of new regulations which, if implemented, would change the salary level required in order for these employees to be treated as exempt.
Under both the proposed and existing regulations, for an employee to be exempt under the white collar exemption, the employee must satisfy three tests. The first is a “salary basis test” and simply requires the employee to be paid on a salary basis rather than, for example, an hourly basis. The second is the “salary level test” which requires the employee to meet a certain salary level. The third is the “standard duties test” which asks whether the employee primarily performs the kinds of job duties that Congress intended to exclude from the law’s overtime requirements.
The proposed rules would change the salary level test-no changes would be made to the salary basis test or the standard duties test. Under existing regulations, workers who meet the standard duties test and earn a salary of $455 per week (the equivalent of $23,660 a year) or more are exempt from overtime pay requirements. The proposed rules would increase the salary threshold to $913 per week (the equivalent of $47,476 per year), thereby significantly increasing the number of non-exempt employees who will be entitled to overtime pay.
While this article focuses on the standard salary exemption, it is worth noting that the proposed rules would also increase the threshold exemption for “highly compensated employees” from $100,000 to $134,004 annually. The primary difference between the standard exemption and the highly compensated employee exemption is the duties test. For highly compensated employees, the duties test is “minimal”—meaning that the employee must simply perform at least one of the exempt duties or responsibilities of an exempt white collar employee.
For the first time, the proposed rules include an automatic adjustment to the salary threshold every three years, with the first change scheduled to take effect January 1, 2020. Each update would raise the threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region. It is estimated that the standard salary exemption threshold on January 1, 2020, would be $51,168.
Among the industries that would be most affected by this proposed change are hospitality, tourism, retail, restaurants, healthcare, higher education, and technology. Job categories most affected include store managers, bank branch managers and assistant managers, finance departments, and admissions office and other college staff.
If the proposed rules are implemented, there are a number of actions employers could take to remain in compliance. The first step should be to determine which white collar employees earn between $23,660 and $47,476 and whether those employees work more than forty hours a week. Remember, if an employee does not work more than forty hours a week, their status as exempt or non-exempt does not matter because there is no entitlement to overtime in the first instance.
Employers wishing to avoid the payment of overtime could consider raising the salary of otherwise-exempt employees who earn below the new threshold. For example, if an office manager earns a salary of $43,000 annually and the job requires frequent overtime, the employer may choose to raise the manager’s salary to something above $47,476 to maintain the exemption.
Employers could also reduce or reallocate non-exempt employee hours. In so doing, the employer would need to consider the effect of hours reduction on benefits eligibility. This option may necessitate moving part-time employees to full-time or vice versa. The employer could also attempt to transfer certain tasks between and among employees to maximize the number of exempt employees.
Finally, if the employer wanted to maintain approximately the same overall compensation level for an employee, it could reverse-engineer the newly-non-exempt employee’s compensation package by calculating an hourly pay rate which will-together with bonuses and anticipated overtime pay-equate to the employee’s present salary. For example, a bank branch manager earning a salary of $40,000 annually equates to approximately $19.23 an hour based on a forty hour work week. Of course, under the proposed rules, the employer woiuld be required to pay this employee overtime. That means the employer would have to take into account the estimated overtime and bonus pay of the employee and reduce the $19.23 rate accordingly, thereby maintaining the $40,000 compensation level.
This option poses several challenges. First, it would require affected employees to keep track of the hours they work—something they are probably not used to doing. Second, it would require the employer to reduce the employee’s effective hourly rate—something the employer would need to be prepared to explain to the employee.
Another option for employers who potentially faced with newly-non-exempt employees would be to use non-discretionary bonuses to reach the salary threshold. The proposed rules allow for up to ten percent of the salary threshold to include non-discretionary bonuses, incentive pay, or commissions. An employer must be aware that if it were to rely on a non-discretionary bonus or commission to satisfy the salary threshold, the employee’s status is subject to change. For example, if an otherwise exempt employee did not earn a high enough commission, his or her compensation could fall below the salary threshold, making him or her eligible for overtime pay under the proposed rules.
These bonuses would have to be paid on a quarterly or more frequent basis to count toward the salary level test. The proposed rules would leave to the employer the ability to establish their own quarterly period.
Challenges for Employers
In addition to the possible obligation to pay overtime where it has not been paid before, the new regulations would bring with them some practical concerns employers would need to consider. As mentioned earlier, a newly-non-exempt employee would have the burden of keeping track of his or her hours. Tracking compensable time can be especially difficult if the employee is expected to receive e-mail, text, or phone calls after hours.
Pay compression is another concern. If employees making just under the threshold of $47,476 were given raises, would that mean employees already making over $50,000 also get a raise? If not, balancing the job hierarchy may become a concern and distinctions between titles and job responsibilities may not mean as much.
The likely impact of these porential changes on exempt employees would likely be longer hours and more job responsibilities. Non-exempt employees, on the other hand, would potentially spend less time on training, mentoring and education. Non-exempt employees generally have less flexibility and more restrictions on the use of their time in order to avoid or limit the obligation to pay overtime.
Finally, if the rules are implemented, employers should budget for the increase in the salary threshold on January 1, 2020, and every three years after that.
Implementation in Doubt
The new rules were originally set to take effect on December 1, 2016, and employers, assisted by their lawyers and accountants, were actively engaged in preparing for the changes that would follow. However, on November 22, 2016, a federal judge in Texas issued a nationwide injunction halting implementation of the proposed rules. The Department of Labor has appealed this decision. With the appeal process ongoing and a new administration set to take office in January of 2017, it is not clear when, if at all, these regulations will take effect. Employers would be well-advised to remain flexible and keep themselves apprised of ongoing developments.