Today, the U.S. Department of Labor (“DOL”) issued the final version of the much-anticipated new Fair Labor Standards Act (“FLSA”) regulations regarding the salary threshold for exempt employees. This post provides employers with insight into how to understand, and ultimately apply, the new regulations, which will affect employers of all sizes in all industries across the country.
I. HISTORY OF THE NEW OVERTIME REGULATIONS
The FLSA provides an exemption from the overtime pay requirement for workers employed as executive, administrative, and professional employees (“exempt white-collar employees”). The FLSA also exempts from overtime pay highly compensated employees (“HCEs”).
To be exempt, an employee must meet three criteria: (a) the employee must be paid on a predetermined “salary basis” (i.e., the employee’s predetermined salary cannot be reduced because of variations in the quality or quantity of work performed); (b) the employee’s salary must meet a minimum salary threshold (currently $455 per week; i.e., $23,660 per year); and (c) the employee must meet the “duties” test of the applicable exemption (i.e., the employee must perform certain white-collar job duties).
On March 13, 2014, President Barack Obama signed a memorandum directing the DOL to update the FLSA’s overtime regulations governing exempt white-collar employees. On July 6, 2015, the DOL announced the much-anticipated proposed regulations, which, among other things, more than doubled the salary threshold required for an employee to qualify as an exempt white-collar employee. In July, we advised that the proposed overtime regulations would have a significant impact on all industries and that employers should analyze their current workforce and anticipate where changes should be made rather than wait for the proposed overtime regulations to be finalized.
The DOL received more than 270,000 comments regarding the proposed overtime regulations, and on March 15, 2016, the DOL sent the proposed overtime regulations to the Office of Management and Budget (“OMB”).
II. THE FINAL RULES ARE HERE
At long last, on May 18, 2016, the DOL released the final overtime regulations, which will become effective in 200 days (i.e., on December 1, 2016). The final overtime regulations:
- increase the exempt white-collar employee salary threshold from $455 per week (i.e., $23,660 per year) to $913 per week (i.e., $47,476 per year);
- increase the annual compensation requirement for HCEs from $100,000 to $134,004;
- require that the salary thresholds automatically update every three years (the salary threshold for exempt white-collar employees will be set at the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region [currently the South]; the annual compensation requirement for HCEs will be set at the 90th percentile of earnings for full-time salaried workers nationally); and
- amend the salary basis test allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold for exempt white-collar employees.
While the final overtime regulations double the salary threshold required for an employee to qualify as an exempt white-collar employee, the threshold is approximately $3,000 less than the proposed threshold that was sent to the OMB in July. Moreover, in contrast to the proposed regulations, the final overtime regulations will not require that the above-mentioned salary thresholds increase annually, which could have been a compliance headache for employers year after year. Instead, the salary thresholds will increase every three years, beginning on January 1, 2020. These minor compromised positions on the part of the DOL likely reflect the pushback Congress received from employers and management-side lawyers regarding the new overtime regulations and their failure to take into account that a nationwide salary threshold may be inflexible and illogical for certain industries and regions.
III. THE TIME TO ACT IS NOW
On December 1, 2016, employees earning less than $47,476 will no longer be eligible for a white-collar exemption to the FLSA’s overtime pay requirements. In addition, employees who earn less than $134,004 can no longer qualify as exempt HCEs. Importantly, the final regulations do not provide any relief or exemption for small businesses, nonprofit organizations, or higher education institutions, which, like all other employers, will now be burdened with having to reclassify employees or provide raises to administrative and executive employees.1
To the extent employers have not otherwise prepared for the final overtime regulations, they should begin to do so immediately. Employers should start by identifying all employees currently classified as exempt under one of the white-collar exemptions. They should then determine what changes, if any, need to be made with respect to each affected employee. While the new regulations do not make any changes to the various “duties” tests under the FLSA, we recommend that employers take this opportunity to do a full-scale audit of their exempt classifications, analyzing the duties each worker performs, along with his or her current compensation structure. Indeed, as set forth above, an employee can be exempt only if he/she meets all three criteria for exemption – the salary basis test, the salary threshold test, and the duties test. Thus, currently exempt employees should be reviewed from all three standpoints to ensure proper application of an exemption. In fact, if/when the DOL begins enforcing its new regulations, employers can expect a thorough three-point review – not a determination based just on the salary threshold – of exempt employees, so it is imperative to shore up exemptions.
Employers also need to ensure that they take into account all forms of compensation that employees receive when conducting their exemption analysis. The new overtime regulations allow employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new salary threshold for exempt white-collar employees; however, such payments must be made on a quarterly or more frequent basis. While nondiscretionary bonuses and incentive payments may be used to satisfy up to 10 percent of the new salary threshold, employers must carefully consider whether such forms of compensation are truly “nondiscretionary.” If an employer improperly determines that a discretionary bonus is nondiscretionary and the employee does not otherwise earn the requisite salary threshold, the employee cannot be classified as an exempt white-collar employee. Employers should also take into account the employee benefits that exempt employees receive and whether any changes to benefit eligibility need to be made in light of the new overtime regulations.
V. IS THERE A MAGIC FORMULA TO ADDRESS THE NEW CHANGES?
Importantly, there is no “one size fits all” solution to the new overtime regulations. While employers could simply reclassify each affected worker as “nonexempt hourly,” this may not be the recommended course of action, depending upon a number of factors, including not only budgetary concerns but also such considerations as(a) the amount of anticipated overtime for those employees and whether that amount can feasibly be controlled; (b) the culture of the employer’s organization; (c) employee morale and how a change from being an exempt employee to punching a clock could be perceived; and (d) what actions competitor companies within the employer’s industry will take regarding the new regulations and whether those actions could affect employee retention.
Other potential options apart from reclassifying employees as nonexempt hourly include meeting the new salary threshold to keep employees exempt, taking advantage of the fluctuating workweek methodology of paying overtime (where appropriate and lawful), limiting working hours to 40 per workweek, and other strategic options. Employers should understand that certain solutions may work best for some positions and/or locations but not for others, so a case-by-case analysis is recommended.
Employers, however, should understand that if they do simply reclassify workers as nonexempt hourly, it may not be as simple as dividing the employee’s current salary by 52 weeks and then by 40 (or some other regularly worked number of) hours, as this formula may – and often will – inadvertently provide the employee with additional compensation. Before an employer decides to reclassify workers as nonexempt hourly, there are multiple other mathematical formulas to consider in terms of reverse engineering a currently exempt employee’s annual salary into an hourly rate. Employers should also be mindful of the fact that being reclassified as nonexempt will also trigger other FLSA-required payments, including for time spent traveling, training, and responding to/drafting work-related e-mails and text messages outside the office.
Significantly, the vast majority of employers faced with tackling the new regulations will likely be faced with the additional challenge of not knowing exactly (or even approximately) how many hours their affected workers may typically be working, since exempt employees are not required to record their time, which may lead to further budgeting issues if an employer underestimates the amount of overtime these employees will work in the year ahead. As a best practice, employers should consider requiring potentially affected employees to record their hours during the 200-day compliance period so the employer can better assess whether the employees will work overtime in the year ahead and, ultimately, determine the best strategy for applying the new regulations to those workers.