In advance of Labor Day, the U.S. Department of Labor (DOL) announced a proposed rule modifying the requirements for employees to satisfy the white collar exemptions under the Fair Labor Standards Act (FLSA).
Under the FLSA, employees are entitled to wages at or above the federal minimum wage and must be paid time and one-half for work over 40 hours in any work week. However, certain employees are exempted from this requirement if they are classified as executive, administrative or professional employees and are paid on a salary basis. All other employees, subject to limited exceptions, are considered non-exempt and must be paid at least minimum wage and overtime for hours worked over 40 in a week. Generally, employers have the burden to demonstrate that an employee is exempt from overtime by satisfying both the salary basis test, that the predetermined salary not subject to adjustment based on hours worked, and the specific duties tests, as defined by DOL regulations. In addition, an employer is required to compensate exempt employees at or above a minimum salary level. Currently, this amount is $684 per week, which equates to $35,568 annually. The DOL's August 30 announcement addresses only the minimum salary threshold to qualify for these exemptions.
The DOL's proposed rule sets the new salary threshold at $1,059 per week, equivalent to $55,068 per year for a full-year worker. However, unlike past adjustments to these amounts, but similar to what was proposed in 2016 under the Obama administration, the DOL is proposing an automatic adjustment every three years thereafter. In addition, the final rule sets the total annual compensation requirement for highly compensated employees at $143,988 annually – it is presently $107,432 per year. Although a topic of discussion, the new rule leaves the current duties tests unchanged.
Employers will be able to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the standard salary level, which is "in recognition of evolving pay practices." These payments include nondiscretionary incentive bonuses tied to productivity and profitability. The final rule requires employers to make such payments on an annual or more frequent basis and allows for a "catch-up" payment in order to credit nondiscretionary bonuses and incentive payments toward a portion of the required salary level within one pay period of the end of the 52-week period. Any "catch-up" payment will count only toward the prior year's salary amount and not toward the salary amount in the year in which it is paid. However, the final rule retains the requirement that highly compensated employees must receive at least the full standard salary each pay period, without regard to the payment of nondiscretionary bonuses and incentive payments, and continues to permit nondiscretionary bonuses and incentive payments, including commissions, to count toward the total annual compensation requirement.
The DOL estimates that the new rules will extend the right to overtime compensation to an estimated 3.6 million workers who are currently classified as exempt.
The proposed rule is available here.
Although the new rule must proceed through a 60-day comment period before a final rule will be published and takes effect, employers are advised to take immediate steps to prepare for those changes now, including:
- Consider potential costs to absorb and manage overtime.
- Review the salary ranges of positions within your organization that are currently considered exempt under the executive, administrative and professional exemptions.
- Identify presently exempt positions earning less than the new $55,068 threshold and determine for which positions an increase in salary may be necessary and appropriate.
- Reclassify employees to non-exempt and consider alternative compensation incentives to counter loss of exempt status.
- Evaluate positions to determine the particular tasks the employee performs on a weekly basis and the number of hours required in order to assess potential overtime impact.
- Determine if certain job duties can be redistributed or eliminated, or if a function can be outsourced.
- Consider whether nondiscretionary bonuses or incentive payments, including commissions, will be sufficient to satisfy the new salary threshold for exemption. Keep in mind that the new rule allows employers to credit these payments in an amount up to 10 percent of the salary threshold.
- Review possible alternative compensation plans rather than simply moving to hourly status, for example, a fixed salary for fluctuating hours.
- Consider restricting hours and schedule adjustments to limit potential overtime.
- Implement policies restricting after-hours use of electronic communication devices.
- Evaluate hours tracking methods and reporting, and develop a plan to begin tracking hours worked by previously exempt employees who may now have to be classified as non-exempt. Employers are required to keep accurate records of hours worked on a weekly basis for non-exempt workers. It may be helpful to begin tracking those hours now in order to plan for the conversion to overtime status.
Stay tuned for additional guidance as new developments unfold.
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