As we reported last week in “A Call to Action: The Comment Period on the new Proposed Overtime Regulations Begins,” employers have a limited window of opportunity to submit comments in response to the proposed revisions to the white collar overtime regulations that the U.S. Department of Labor (DOL) released on June 30 and that werepublished in the Federal Register on July 6. One of the topics on which the DOL is expressly seeking comments is whether employers should be allowed to use nondiscretionary bonuses to satisfy some portion of the minimum salary requirements for the executive, administrative, and professional (EAP) exemptions to the overtime requirements contained in the federal Fair Labor Standards Act (FLSA). This topic is of particular importance to the retail and restaurant industries.

Background

To qualify for one of the EAP overtime exemptions, an individual currently must be paid at least $455 per week in the form of a salary and must meet various job duties requirements. Under the DOL’s proposed revisions to the FLSA overtime regulations, the minimum salary threshold will increase to the 40th percentile of all salaried employees, which the DOL projects will be $970 per week when a final rule is issued in 2016. Annualized, this means that the minimum salary requirement will more than double from $23,660 to $50,440 per year.

A salary is generally defined as “a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” Subject to certain exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work.

The Issue

In today’s workplace, many employers pay some or all of their salaried exempt employees other forms of compensation in addition to a salary. These other forms of compensation commonly take the form of bonuses and other incentives that are tied to the financial performance of the employer or to some division, unit, physical establishment, or group of employees over which the exempt employee has responsibility. These payments may be based on a predetermined formula and may be guaranteed as long as certain criteria are met, but the actual amount that will be paid cannot be predetermined or guaranteed unless and until all of the criteria are met and the financial performance is calculated. These payments often are paid on a monthly, quarterly, six-month, or annual basis and may constitute a substantial portion of an employee’s total compensation.

Thus, an issue now being considered by the DOL is “whether to allow nondiscretionary bonuses to satisfy some portion of the standard test salary requirement.” The DOL notes in its proposal that this is in response to stakeholders “pointing out that in some industries, particularly the retail and restaurant industries, significant portions of salaried EAP employees’ earnings may be in the form of such bonuses.”

In a more lengthy discussion of this issue, the DOL emphasizes that it believes it is important to strictly limit the amount of the salary requirement that could be satisfied through the payment of nondiscretionary bonuses and incentive pay and is considering whether 10 percent of the salary requirement is an appropriate level. “The Department recognizes that some businesses pay significantly larger bonuses and where larger bonuses are paid, the amount attributable toward the EAP standard salary requirement would be capped at 10 percent of the salary level if such a provision were adopted.” The DOL also states that the time period over which such payments are made also must be considered and envisions that, in order for a business to take a credit toward the weekly salary requirement, the bonus would need to be paid monthly or more frequently. The DOL is not considering an annual catch-up payment for the EAP exemptions, as is allowed when calculating the total annual compensation for the highly compensated employee (HCE) exemption.

Comments Being Sought by the DOL

With regard to nondiscretionary bonuses, the DOL expressly states that it is seeking comments and information concerning the following:

  • “what industries commonly have pay arrangements that include nondiscretionary bonuses and incentive payments”;
  • “what types of employees typically earn nondiscretionary bonuses and incentive payments”;
  • “the types of nondiscretionary compensation employees receive”;
  • “to what extent including nondiscretionary bonuses and incentive payments as part of the salary level would advance or hinder that test’s ability to serve as a dividing line between exempt and nonexempt employees”;
  • “whether payment on a monthly basis is the appropriate interval for such nondiscretionary compensation that will be credited toward the weekly salary requirement”; and
  • “whether 10 percent is the appropriate limit on the amount of the salary requirement that can be satisfied by nondiscretionary bonuses and incentive payments (with the remaining 90 percent paid on a salary or fee basis in accordance with the regulations).”

Action Steps for Employers

In response to the DOL’s proposal, employers who pay bonuses or other supplemental forms of compensation to their salaried exempt employees should be taking the following steps:

  • Identify which of your currently exempt employees will no longer meet the exemption requirements based on the anticipated new salary threshold if changes are not made to their salaries.
  • Analyze what percentage of those employees would meet the annual EAP compensation threshold if all nondiscretionary bonuses were counted toward the salary requirements.
  • Analyze how those figures would change, i.e., what percentage of those employees would meet the annual EAP compensation threshold, if only nondiscretionary bonuses paid on a monthly or more frequent basis were counted toward the salary requirements.
  • Analyze how those figures would change, i.e., what percentage of those employees would meet the annual EAP compensation threshold, if only 10 percent of the salary requirement could be met through the payment of nondiscretionary bonuses.
  • Identify commissions and other forms of compensation you pay that you may not refer to as “bonuses,” but which are similar in nature to bonuses, and determine how the inclusion of these payments would impact your analysis.
  • Consider how seasonal variations in business may impact these numbers, and whether you could make advances or catch-up payments to meet the minimum salary requirements on a weekly or monthly basis.
  • Prepare comments to the DOL reflecting your analysis and practical experience. Do not be afraid to recommend that employers be allowed to fulfill more than 10 percent of the salary requirement in the form of nondiscretionary bonuses, similar payments that are not called “bonuses,” and even to discretionary payments if that is what would be needed to meet the anticipated salary requirements.

Remember that the issue of nondiscretionary bonuses is one of many topics on which the DOL is requesting comments. The DOL is proposing and considering further revisions to the regulations that will also impact your business.

For example, the DOL is proposing annual increases to the minimum salary threshold that will be indexed to changes in the 40th percentile of all salaried employees or to inflation. The DOL also is considering adding a requirement that an employee spend at least half of his or her time performing so-called exempt duties. In the retail and restaurant industries, where managers often are expected to lead by example and pitch in when help is needed, the combination of doubling the minimum salary requirement, increasing that minimum salary annually, not allowing any credit for bonuses or commissions, and imposing a percentage-of-time requirement, could be devastating.

As a result, employers should prepare comments on bonuses that take these other revisions into account and prepare comments on all topics that are relevant to your business.

Comments currently are due no later than Friday, September 4, 2015, and can be submitted electronically atregulations.gov by typing the Regulatory Information Number (RIN) 1235-AA11 into the search box and choosing the DOL’s proposal, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.” The preparation and submission of comments does not require a lot of complexity and is discussed in greater detail in our “A Call to Action: The Comment Period on the new Proposed Overtime Regulations Begins” blog post.

Concluding Thoughts

All employers need to be developing a plan to adjust to whatever changes may be contained in the final rules. With respect to bonuses and other forms of compensation that do not currently count toward salary requirements, employers will need to consider adjusting their compensation programs so that a higher percentage of an exempt employee’s income will be in the form of a guaranteed salary.

Employers also need to recognize that nondiscretionary bonuses must be considered when determining the regular rate of pay for purposes of calculating overtime. In other words, if an employee who receives nondiscretionary bonuses is not exempt from the overtime rules, an employer must take into account those bonuses and the weeks to which they may be attributable when calculating overtime. This is not necessarily a simple or straightforward process, particularly in situations in which employees are paid every two weeks and bonuses are based on monthly performance metrics. Employers who decide to convert certain employees’ status to non-exempt in response to the proposed regulatory changes need to take this into account when revising pay plans as part of the conversion process.