The overtime regulations are almost here and will affect more than 4 million employees across the country. Although a pending lawsuit seeks to halt the regulations, employers should prepare for the probability that they will soon be faced with new rules for paying white collar employees. The most significant change made by the overtime regulations will raise the minimum salary level for the white collar—executive, administrative and professional—exemptions under the Fair Labor Standards Act (“FLSA”) from $455 per week to $913 per week. After December 1, 2016, any employee earning below that threshold will no longer fall under the white collar exemptions from overtime pay.
Since 2004, the salary level for white collar overtime exemptions has been $455 per week, or $23,660 per year. The new rule more than doubles this amount, setting the minimum salary at $913 per week, or $47,476 per year. The current minimum salary level to qualify as an exempt “highly compensated” employee is $100,000 per year. The new rule increases it to $134,004.
Most exempt employees are classified under the three core white-collar exemptions—the executive, administrative, and professional exemptions. These exemptions require both that an employee perform certain duties and receive a guaranteed salary at or above the requisite, minimum threshold. The new regulations also permit employers to use certain other forms of compensation to satisfy up to 10 percent of the new minimum salary requirements, which must be paid at least quarterly and may include nondiscretionary bonuses, incentive payments and commissions. Importantly, a bonus is not “discretionary” under this rule if an employer either commits in advance to paying a bonus, or states the amount of the bonus or method of calculation in advance. That covers the vast majority of bonuses paid under a predetermined bonus or incentive plan.
In an unprecedented step, the final rule automatically increases the minimum salary level every three years. The first update will take effect January 1, 2020, with future increases every three years, effective January 1 of that year. The Department of Labor (“DOL”) will publish the new rates at least 150 days before the updated salary levels go into effect.
Why You Should Care
Ignoring these upcoming changes, or improperly paying employees, can have significant consequences, including damages for back wages, an equal amount as liquidated damages, attorney's fees and court costs, as well as injunctive relief. A two-year statute of limitations applies to the recovery of back pay, except in the case of a willful violation, in which case a three-year statute applies. Even before these changes, FLSA compliance has been a business necessity, with FLSA litigation becoming rampant since the last overhaul to the rules in 2004. The DOL also has intensified its investigative efforts, even coordinating with state agencies.
Part Timers Included
Importantly, the regulations do not distinguish between full-time and part-time employees. Subject to some limited exceptions, in order to qualify for a white-collar exemption after December 1, 2016, an employee must be paid at least $913 per week on a salary basis. The regulations do not permit the minimum salary level to be prorated for someone working less than a full-time schedule. The standard of $913 per week is the minimum regardless of how many hours someone is scheduled to work.
What Stays the Same
The main changes presented in the final rule relate to the minimum salary levels that apply to the white collar overtime exemptions, as well as the formulas for calculating and increasing these levels. However, no changes were made to the exemptions for outside salespeople, teachers, lawyers or doctors. The final rule does not change the duties tests or the salary basis test under the FLSA. Therefore, employees must still be paid a fixed, predetermined salary that is not subject to reduction due to variations in the quality or quantity of work in a workweek.
What Should Employers Be Doing?
An immediate plan of action is critical, which may include identifying and engaging human resources staff and management as key players in a carefully devised compliance strategy. These individuals should assess the new rules’ bottom line impact and decide how best to proceed. A lawyer’s involvement also helps employers to navigate the new legal requirements and ensure that any work product can remain protected if the employer’s decisions are ever called into question through litigation.
A good starting point is to identify all exempt employees to determine the cost of increasing the salaries of exempt employees earning less than the new salary level. Next, employers should analyze the cost of reclassifying those employees to nonexempt, overtime-eligible status. Given that exempt employees do not track all hours worked, employers will have to estimate the actual hours they are working. Through this analysis, employers can compare the cost of increasing salaries to the cost of reclassification.
This is also a good opportunity to determine whether particular exempt employees were properly classified to begin with. The first place to look may be to the current job descriptions. Although job descriptions are not determinative of whether a position is properly classified as exempt, they are certainly helpful. Employers can also conduct an audit through interviews with supervisors of the impacted employees. After the assessment, and any reclassification, employers can determine new hourly rates for impacted employees and potentially revise or update current timekeeping programs and policies to reflect the changes. Finally, employers should implement training for both managers and employees to address these changes.
Getting Creative: Other Pay Options
While an hourly rate is the most common way to pay nonexempt employees, the regulations allow for other pay plans, such as a day rate, a piece rate, and even a salary. By meeting certain conditions, these options can offer employers a way to reduce their overtime spend by paying overtime hours at a reduced rate. The concept behind these alternate pay plans is to provide straight-time pay to the employee for all of their time worked, leaving only the one-half overtime premium to be paid for any hours worked over 40 in individual workweeks.
For salaried, non-exempt employees, an employer can also choose to pay a basic weekly salary for all hours worked, paying extra for any overtime hours. Another attractive option for employees who work irregular schedules is referred to as the “fluctuating workweek” method. Under this plan, the employer pays a salary for all hours worked each week, whether few or many. Because the salary under this sort of plan provides straight-time pay for all hours worked, not just a set number of hours, only the half-time premium is due for any overtime hours worked.
The DOL’s Wage and Hour Division (“WHD”) is maintaining website with comprehensive information. Particularly helpful is list of more than 100 questions and answers that the WHD posted fairly recently at https://www.dol.gov/whd/overtime/final2016/webinarfaq.htm. This guidance offers valuable insight into how the DOL might view the new rule as employers try to navigate these new regulations.