New regulations effective December 1, 2016 may cause more than 20 Million Employees to become overtime eligible and will affect 7.4 million employers:
- In order for an employer to rely upon the Executive, Administrative, Professional "White Collar" exemptions, they will have to pay employees at least $913 per week, equivalent to about $47,476 annually (rather than the current $455 per week, equal to about $23,360 annually);
- The exemption under the "Highly Compensated Employee" category went to $134,000 from $100,000 annually;
Just when you thought it was safe to go back into the water, the Department of Labor just announced changes to the salary standards under the FLSA exemptions for the Executive, Administrative, Professional and Highly Compensated Employees. Employees who are currently exempt under the Executive, Administrative, Professional and Highly Compensated Employee exemptions are not entitled to receive overtime pay for hours worked in excess of 40 hours per week. It has been twelve years since the Department of Labor last updated the salary standards and the changes to the salary standards announced yesterday are expected to affect an estimated 4 million employees.
Under the current
regulations, in order for an employee to be exempt under the Executive, Administrative, and/or Professional exemption, an employee must (among other non-salary based requirements) earn at least $455 per week; equal to about $23,360 annually. A highly compensated employee is exempt from minimum wage and overtime if (among other non-salary based requirements) the employee makes at least $100,000 per year. These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine.
Roughly six months from now, the FLSA’s minimum salary standards will increase significantly as a result of the Department of Labor’s changes. Once these changes take place, employees who are currently exempt under the Executive, Administrative, and Professional exemptions will need to make at least $913 per week, equivalent to about $47,476 annually, to remain qualified for the exemption (among other non-salary based requirements), more than a 100% increase in an employee’s weekly salary!
Highly compensated employees will need to earn $134,004 to remain qualified for the exemption; an increase of almost 30% in an employee’s annual salary. The new changes also require the Department of Labor to automatically update the salary standards every three years beginning on January 1, 2020. The new regulations will allow employers to count earnings paid to employees as bonuses and commissions toward meeting the salary threshold (up to 10% of the salary threshold). There is a limited carve-out for certain providers of Medicaid-funded services.
The increase in the salary standards are automatically updated every three years. The new regulations are sure to have widespread effects on businesses by, among other things, reducing the number of employees who qualify for exempt status and increasing the number of employees who are eligible for overtime pay under the FLSA
In customizing practices in their own particular businesses, employers could consider the following safeguards to ensure a seamless implementation of these salary standard changes to reduce the likelihood of unnecessary litigation for failure to pay overtime:
- Have a Wage and Hour Audit and investigation conducted. Revise and update internal exempt v. nonexempt checklists. Conduct a review of internal policies and practices to determine whether employees are properly categorized as exempt/nonexempt. Review and revise classifications based on duties, reporting structures, salary and compensation structures;
- Consider the need to review and revise timekeeping methods and reporting time;
- Consider other options of compensation, e.g. fluctuating work week; keep in mind that overtime issues relate to those employees working more than 40 hours per week so consider adjusting schedules accordingly;
- Because bonuses and commissions can be considered as part of the minimum $913 required to be paid each week, consider how much base to pay certain employees on a regular basis (perhaps at least 90% of the minimum required amount), how often to provide bonuses and commissions (monthly or quarterly) and consider a “catch-up bonus” on a quarterly basis if and when necessary;
- Consider what duties to assign to each employee to ensure that they are classified correctly as exempt and decide whom you choose to be asked to work overtime;
- Consider taking steps necessary to keep exempt employees exempt (increase salary, add duties, provide a sufficient amount of commissions and bonus, etc.) or shifting them to another exempt category (e.g., 7(i) internal retails sales and outside sales exemptions);
- Be sure not to take improper deductions that may cause you to lose an exemption;
- Implement a Safe Harbor provision to remedy an improper deduction from an exempt employee’s salary;
- Make sure you’re correctly calculating the regular rate of newly recognized non-exempt employees—that will ensure that the calculation of the overtime rate is correct also;
- Avoid auto-deduction policies and lunchtime issues;
- Review all other payroll and benefit terms to consider changes to coincide with these new changes required by the DOL so that they are rolled out together in a way that helps maintain morale and decrease the chances of employees considering a lawsuit, especially among long term employees who previously had never been required to punch a clock/record their time;
- Consider waivers of class action claims and jury trial and consider mandatory arbitration with a mediation pre-condition;
- Coordinate changes with payroll vendors;
- Consider state-by-state variances (California is the most unique);
- Provide training to members of Human Resource departments regarding:
Train those employees who will become non-exempt about internal policies regarding:
- the changes to the salary standards;
- obligations to comply with the salary standards changes;
- broadening oversight for employees who will soon be non-exempt;
Train those employees who will become non-exempt about company restrictions related to:
- clocking-in/clocking-out for lunch;
- taking uninterrupted lunch breaks;
- leaving work to attend medical appointments and tending to child-care obligations, among others.
Consult an attorney, which among other things, may help establish a “good faith defense” if a lawsuit is filed. Follow up and conduct a review and new audit every three years.
- working overtime;
- working at home;
- checking company email and/or using company provided electronic devices after hours.
For more information on how to prepare for the salary standards changes under the FLSA, implementing safeguards to reduce the likelihood of unnecessary litigation for failure to pay overtime under the FLSA and fashioning personalized policies and procedures for your business, contact a member of the Schwarzberg & Associates Employment Law Compliance and Defense Practice Group: Steve Schwarzberg
or Lisa Kohring