It's like déjà vu all over again. Many employers will recall putting plans in place, and maybe even handing out raises, in 2016 to comply with changes to the Fair Labor Standards Act's minimum salary thresholds, only to learn that a Texas federal judge had blocked the rule from taking effect on the eve of implementation.
After years of waiting and speculation, the US Department of Labor (DOL) issued a new proposed rule last week. If finalized, the new rule's most significant impact will be to raise the minimum salary an employee must be paid to be exempt from overtime under the FLSA from $23,660 per year ($455 per week) to $35,308 per year ($679 per week).Although this change will have little to no effect on employers in states such as New York and California where the minimum salary threshold already far exceeds the federal standard ($58,500 for large employers in New York City and $49,920 for large employers in California), it could have a significant impact on employers located throughout the rest of the country.
Generally, white collar employees who are employed in an executive, administrative or professional role (as those terms are statutorily defined) are exempt from the FLSA's minimum wage and overtime requirements. To determine whether one of these three exemptions applies to a particular job description, employers must consider both the duties of the position and the salary levels for those who hold the position. The new rule does not change the duties test for each of these three exemptions; rather, it increases the salary threshold, requiring that employees who make less than a certain dollar amount be paid the minimum wage for all hours worked and receive overtime for all time worked over 40 hours in a single workweek.
The salary threshold has been static at $23,660 per year ($455 per week) since 2004. The Obama era rule from 2016 would have increased that threshold to $47,476 per year ($913 per week).
The new rule essentially splits the difference, increasing the threshold to $35,308 per year ($679 per week). It also contemplates the possibility of regular increases to the new salary threshold to occur at four-year intervals, but any such increases must go through a notice-and-rulemaking process before implementation. This is a significant departure from a much criticized provision in the Obama era rule, which made increases automatic over time without providing the opportunity for comment periods.
In the most unanticipated move, the new rule also increases the salary threshold for highly compensated employees from $100,000 to $147,414 (a greater increase than that previously proposed in the Obama era rule). The highly compensated employee exemption (which is not applicable in states such as California) applies to white collar employees who perform office or non-manual work, customarily perform one or more of the duties required of an exempt executive, administrative or professional employee, and earn the annual salary threshold
Once the proposed new rule is published in the Federal Register, interested parties will have a period of 60 days to submit comments.The proposed new rule is expected to take effect in January 2020 and is expected to impact approximately one million workers (or a quarter of the number of workers the DOL expected to be impacted by the proposed 2016 rule).
So here we go again: how can employers prepare for the 2020 changes?
- Audit job duties
The new rules increase the salary threshold requirements for executive, professional and administrative jobs, but keep the duties tests for those exemptions unchanged, so prior to conducting a salary review, employers should ensure that jobs currently classified as exempt actually meet the duties test for the applicable exemption. If they do not, then the job should be reclassified as non-exempt from the overtime requirements of the FLSA.
This review should include a deep dive into what the job duties actually are. Job titles alone are not determinative of an exemption and can often be misleading where the words "administrative" or "executive" are incorporated into the job title. In some cases, a simple review of the job description may not even show the whole picture. Rather, it's important that job descriptions and the exemption analysis take into account the day-to-day activities and expectations for each job. Manager and other employee input can often be useful in identifying the real duties of the position, particularly where the individuals performing the review do not have regular contact with the employees in those positions.
- Review salaries
Once employers determine that the job under review meets the duties requirements for the applicable exemption, the next step will be to determine whether the new salary thresholds are met. If employees are already compensated at or above the new thresholds, the analysis ends here, and no changes will be required.
Under the new rule, employers may now use certain nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary threshold level. As a result, employers should consider the total compensation package in conducting a salary review, rather than limiting the analysis to annual salary alone. Employers should, however, take note of applicable state law, as some states may not allow bonuses, commissions, and other incentive compensation to count toward the minimum salary requirement. Where state law is more favorable to the employee, the law of the state where the employee is located will control.
- Assess whether to reclassify workers as non-exempt or to raise compensation where the salary threshold is not met
If a job meets the duties test for the applicable exemption, and the salary still falls short of meeting the new threshold, employers will have to make a business decision of whether to increase the employee's overall compensation or to convert the job to a non-exempt position. In instances where the existing salary falls just short of the new threshold, a small raise to bring the job in line with new exemption requirements may be an easy judgment call. In cases where the disparity is greater or where there is significant salary compression within the employer's organization, the question of whether to raise salaries or reclassify may be a bit more complicated.
Employers should consider a variety of factors, including some of the following:
- The number of hours typically worked will impact potential overtime costs and should be carefully monitored and considered before changes are made and before new hourly rates are implemented. In conducting such an analysis, employers should also consider seasonal or other business-related shifts in work requirements throughout the year, which might influence overtime costs.
- The challenges and costs of implementing a time monitoring system should be weighed. If, for example, employees in a particular job classification work remotely or in offices far removed from supervisors, monitoring actual time worked may present significant hurdles. If, however, employees in the job classification in question work in close proximity to supervisors and/or are in locations where timekeeping systems are already in place, then the challenges of implementation and risks of abuse may not present real issues.
- The effect on employee morale that a change in exemption status may present may be difficult to quantify, but should be a factor in any final decision. Some employees may consider a shift from a salaried position to an hourly position where they are asked to clock-in and out as a negative shift in prestige, which may have an unintended effect on recruiting and/or retention. In addition, if certain employee benefits (eg, PTO accrual) are different for exempt vs. non-exempt positions, those differences may also influence morale and job satisfaction.
- The position should not be analyzed in isolation, but rather a review of the other positions in the chain of command should also be considered. Consider, for example, the following scenario: team leads currently make $34,000 per year and are classified as exempt, and the general managers and regional managers to whom they report are compensated at respective rates of $35,500 and $37,000 per year. At first glance, the decision to raise the team lead salary by $1,500 per year to bring it in line with the new salary threshold requirements may seem like an easy call, but this salary change would mean that team leads are now making the same salary as their supervisors. Employers must, therefore, consider the ripple effect associated with salary adjustments in analyzing how these changes could alter overall compensation costs.
- Other options to consider for converted employees
Employers may wish to consider other options for employees converted to non-exempt status such as the "fluctuating workweek" method of compensation, which would allow for the payment of half-time overtime instead of time and a half. Generally, to qualify for this method of compensation (which is not available in some states such as California, Pennsylvania and New Mexico), the following conditions must be met: (a) The employee is paid a fixed salary each week that does not vary based on the number of hours worked; (b) There is a clear mutual understanding that the fixed salary will be paid regardless of the number of hours worked; (c) The employee's hours fluctuate from week to week; (d) The amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage for all hours worked in any workweek; and (e) The employee is paid an additional amount for all overtime hours worked (ie, hours over 40 in any given workweek) at a rate not less than half the employee's regular hourly rate of pay – such half rate would vary week-to-week depending upon the number of hours worked by the employee in such week.
Because the overtime rate (but not fixed base salary) changes every week due to the employee's fluctuating schedule, there would be an increased administrative burden which would make this approach impractical for many employers, but it could result in significant savings if all requirements are met.
- Plan how changes will be messaged to employees
Employers should carefully consider how changes will be communicated to employees. Employees who are shifting from exempt to non-exempt will need training on time keeping and other related procedures and will likely have questions about how the change will affect their annual pay and other benefits. Employees who receive raises should, of course, receive notification, but employees who will not be impacted may also have questions about why they did not receive raises while others in the business unit did. Careful messaging and planning can help employers stop the rumor mill in its tracks, avoiding hurt feelings and misinformation. Remember that large changes in take-home compensation often lead to litigation (ie, if someone now eligible for overtime is doing the same job but is suddenly making substantially more money). So think in terms of messaging about new/changed duties, as well as changed compensation, to minimize potential risk.
Learn more about the implications of the proposed rule by contacting any of the authors or your regular DLA Piper contact.