As a result of the new final rule issued by the Department of Labor ("DOL") on May 18, 2016, employers will be required to pay all employees deemed ineligible to receive overtime pay under the executive, administrative, and professional exemptions at least $913 per week ($47,476 annually). Unless Congress intervenes (which appears unlikely), this change will take effect on December 1, 2016. Although this change was expected (the DOL floated the possibility of raising the minimum salary to over $50,000 in June 2015), it remains a significant change for many employers, as it represents more than a 100% increase over the previous minimum salary of $23,660.
This monumental change in the minimum salary will force many employers, especially businesses like small-box retail stores and restaurants, to decide whether to change the classification of salaried employees who make less than the new minimum threshold to hourly wage earners or to raise their salaries to comply with the new federal mandates. Raising salaries could erase the profitability of small-margin businesses, especially if prices for goods and services are not raised. Moreover, if competitors reclassify salaried employees as hourly to avoid the increased salary threshold, they could gain a valuable competitive advantage.
In analyzing whether to keep salaried employees above the newly raised threshold, employers should certainly revisit whether affected employees are properly considered exempt from overtime obligations. If employers do provide hefty raises to employees to continue to treat them as salaried, these increases could significantly boost potential damages for employees who later claim they were misclassified as exempt. For example, employees who receive a raise from $35,000 to $47,476 to satisfy the new regulations would enjoy a $6.00 per hour raise (based on 2,080 hours worked per year). If these employees later successfully challenge their exempt status, they could claim increased damages of roughly $9.00 per hour based on this raise.
We will continue to monitor developments relating to the DOL's new minimum salary rule, including whether Congress attempts to override the DOL in the next 60 days.