Legal updates

U.S. DEPARTMENT OF LABOR ANNOUNCES FINAL OVERTIME RULES: 

May 18, 2016

SALARY TO BE CLASSIFIED AS AN EXEMPT EMPLOYEE MORE THAN DOUBLES

On May 18, 2016, the Department of Labor announced the publication of its final rule updating the overtime regulations in the Fair Labor Standards Act (“FLSA”). Most importantly, the final rule more than doubles the minimum salary required in order for most employees to be classified as “exempt” from the overtime provisions of the FLSA. Currently, in order to be classified as an exempt administrative, professional, or executive employee, most employees need to be paid a minimum salary of at least $455 per week ($23,660 per year). Under the new rule, the minimum salary will increase to $913 per week, which equates to an annual salary of $47,476 per year. The rule applies equally to all employers in both the public and private sectors. The final rule becomes effective on December 1, 2016.

The final rule closely follows the DOL’s Notice of Proposed Rule making, which was published on June 30, 2015, but there are several important differences between the original proposal and the final rule. These differences include:
  • Originally, the Department planned to increase the salary requirement to $50,440 per year ($970 per week). As just mentioned, the salary requirement in the final rule has been lowered to $47,476 per year ($913 per week).
  • Originally, the Department planned that the salary requirement would be updated every year, and that the salary would be tied to the 40th percentile of all full-time, salaried workers in the country. In the final rule, the salary requirement will be updated every three years. Furthermore, the Department will not look at the 40th percentile on a nationwide basis, but will only look at the 40th percentile in the lowest-wage Census Region.
  • The salary requirement for the highly compensated employees exemption will increase to $134,004 per year. This is based on the 90th percentile of full-time salaried workers nationally (not regionally).
  • The final rule does not include any changes to the exempt status “duties” tests.
  • Under the final rule, up to 10% of the minimum salary can be accomplished through the payment of nondiscretionary bonuses.
These changes are described below in greater detail.

Minimum Salary Is $47,476 Per Year

Beginning on December 1, 2016, in order to be properly classified as “exempt” from the overtime requirements of the FLSA, employees must receive a salary of $913 per week or $47,476 per year. The DOL based this salary on the 40th percentile of earnings for full-time salaried workers in the lowest-wage Census report, which is currently the South. The DOL estimates that 4.2 million employees who are currently classified as exempt employees will not meet the new minimum salary level.

It is critically important that all employers review the salaries paid to their exempt employees. If an exempt employee is paid less than $47,476 per year, the employer needs to decide what changes it will make before December 1, 2016. As outlined in our alert when the Notice of Proposed Rulemaking was published last year, employers have several options:

  • Increase the employee’s salary to meet the new minimum and keep the employee classified as exempt.
  • Convert the employee to a non-exempt position. If the employee will be converted to non-exempt, the employer must make additional decision: how will the employee be paid as a non-exempt worker? Some options to consider include:
  • If the plan is to convert the employee to a non-exempt position, consider restructuring the employee’s pay so that the employee is paid on an hourly basis instead of a salary basis.
  • If the plan is to convert the employee to a non-exempt position, consider reallocating responsibilities to minimize the amount of overtime that will be paid.
  • If the plan is to convert the employee to a non-exempt position, but overtime will be required, consider adjusting the hourly rate of pay so as to minimize the impact of the new overtime costs.
  • If the plan is to convert the employee to a non-exempt position, review your benefit plans to determine what secondary effects the change might have on the employees’ eligibility for those benefits. The terms of some benefit plans limit their availability to only “exempt” or “non-exempt” employees.
  • Although rare, it is possible that this rule will impact some bargaining unit employees who are classified as exempt employees. If you have any such employees, you need to carefully consider your bargaining obligations with respect to making any changes to the way in which those employees are paid.
Automatic Updates Every Three Years

Under the final rule, the DOL will automatically update the minimum salary every three years. The minimum salary will continue to be the 40th percentile for full-time, salaried workers in the lowest-wage Census Region at the time. The first change to the minimum salary level will be effective January 1, 2020. The Department has said that it will publish the new salary levels at least 150 days before they become effective.

The automatic escalator presents two significant challenges. The first challenge is a budgetary challenge. For example, if an employer operates on a May 1 fiscal year, it will be difficult to budget overtime and salary expenses with precision for the fiscal year May 1, 2019 to April 30, 2020. That is because the new salary level will not be announced until August 4, 2019, long after the budget was established for that fiscal year. The best that can be done is to look at the most current census data, estimate what the change to the salary level is likely to be, and make mid-year adjustments if the final salary level is different than your predictions.

Second, the automatic escalators present a mathematical challenge. That is because the department’s 40th percentile measurement is tied to the pool of salaried employees, not the pool of all wage earners. Based on the DOL’s own predictions, approximately 2.4 million employees will have to have their wages increased or be reclassified as non-exempt. While in theory some employers might choose to classify those employees as “salaried, non-exempt,” in practicality most employers will raise salaries or convert those employees to hourly workers. That will significantly change the pool on which the 40th percentile is measured. Thus, the minimum salary will be driven further up, resulting in cyclical increases that can easily exceed the growth in the cost of living.

No Changes To The “Duties” Tests

The Notice of Proposed Rulemaking suggested that the DOL might make changes to the “duties” tests to make those tests stricter. Fortunately, the final rule includes no such changes. However, the mere possibility of changes to the duties tests serves as a very important reminder. Many employers make the mistake of thinking, “all salaried employees are exempt.” That is wrong, and can lead to significant legal liability for unpaid overtime wages. In addition to the salary basis test, all exempt employees must satisfy one of the “duties” tests. By far, the most common exemptions are the administrative, executive, and professional employee exemptions.

Although the duties tests did not change, the new regulations present employers with a perfect opportunity to audit their exempt status classifications to make sure that all employees are classified properly. Application of the duties test is a fact-intensive, nuanced inquiry. We strongly encourage all employers to consult with their legal counsel to ensure their employees are properly classified.

What Should Employers Do?

Employers should strongly consider taking the following action:

1. Clark Baird Smith LLP will be hosting a seminar in the very near future to help employers cope with these new regulations. Details will follow as soon as the logistics have been finalized. You should strongly consider attending this seminar if you have any exempt employees who currently earn less than $47,476 per year. You should also attend this seminar if you have any questions about the application of the exempt status regulations to your work force.

2. Identify all of your exempt employees and determine whether those employees earn at least $47,476 per year.

3. If an employee does not meet the increased salary basis test, begin to plan your strategy if the proposed rule becomes a final rule. Options to consider include:

a. Increase the employee’s salary to meet the new minimum.

b. Plan to convert the employee to a non-exempt position.

i. If the plan is to convert the employee to a non-exempt position, consider restructuring the employee’s pay so that the employee is paid on an hourly basis instead of a salary basis.

ii. If the plan is to convert the employee to a non-exempt position, consider reallocating responsibilities to minimize the amount of overtime that will be paid.

iii. If the plan is to convert the employee to a non-exempt position, but overtime will be required, consider adjusting the hourly rate of pay so as to minimize the impact of the new overtime costs.If the plan is to convert the employee to a non-exempt position (either hourly or salaried), review your benefit plans to determine what secondary effects the change might have on the employees’ eligibility for those benefits.

4. The employer’s budget should be re-examined to ensure funding is available to cover potential cost increases.

5. Use these changes as an opportunity to conduct a legal review of your employees’ job responsibilities to ensure that the employees are properly classified as “exempt” under both the duties test and the salary basis test. A legal review could help provide a “good faith” defense to some forms of damages in wage-and-hour litigation.

If you have any questions about how the Notice of Proposed Rule making may affect you, or if you would like assistance submitting comments to the DOL or conducting an exempt-status audit to help verify compliance with the law, please contact any of the attorneys at Clark Baird Smith LLP.