Proposed Changes to the White-Collar Exemptions Will Require Companies to Increase Exempt Midlevel Managers' Salaries or Pay Overtime
The United States Department of Labor (“DOL”) recently announced major changes to the Fair Labor Standards Act’s (“FLSA”) overtime exemptions to take effect in 2016. Currently, administrative, executive, and professional employees (“white-collar employees”)[1] who satisfy a duties test, must also meet a salary test and be paid at least $455 per week to be exempt from the FLSA’s overtime requirements.[2] If the employee satisfies both tests, the employer is permitted to pay the employee on a salary basis without having to pay overtime. The DOL’s proposed rule more than doubles the current salary requirement to approximately $970 per week, which would cause nearly five million employees to lose their exempt status and become eligible for overtime.[3] This article explores the proposed changes to the white-collar exemptions, its potential effects, and how employers should prepare.
A. The Proposed Changes Represent a Major Paradigm Shift for White-Collar Exemptions.
In July 2015, the DOL published its notice of proposed rulemaking regarding the white-collar exemptions,[4] and proposed changes[5] to tie the salary test for white-collar exempt employees to the fortieth (40th) percentile of weekly earnings for full-time salaried workers.[6] This would increase the current salary threshold for exempt employees from $455 per week (or $23,660 per year) to approximately $970 per week (or $50,440 per year) in 2016.[7] The salary threshold will increase annually to adjust for inflation.[8]
B. The Proposed Changes will Drastically Affect both Employers and Employees.
If enacted in its current form, the proposed changes will alter how many employers conduct business. The retail and restaurant industries rely on exempt managers—earning more than the current $23,660 annual threshold, but below the proposed $50,440 annual threshold—to work over forty hours per week. The proposed changes require employers to either increase the manager’s salary, or convert the manager to a non-exempt employee and set an appropriate hourly rate that will likely be a significant decrease from the employee’s current hourly rate to account for overtime pay.[9]
Employers who increase the manager’s salary will incur a significant cost, and will be overpaying for the manager’s skill set in an effort to maintain the exemption and not pay overtime. Even if the company decides to increase an employee’s salary to the proposed $50,440 threshold, the proposed changes will require the company to annually increase the employee’s pay because the salary requirement is tied to all salary earners. Some commenters to the proposed changes note that because many employers will convert exempt employees to non-exempt employees, the average of salary earners will increase substantially.[10] This will result in a chain effect that will increase the salary threshold to match the increased fortieth percentile of weekly earnings for full-time salary workers.[11] Accordingly, while it may make sense now to marginally increase an employee’s salary to meet the proposed salary threshold, it may not in the near future.
Millions of employees may soon be required to punch in and out and record their time if the DOL's proposed changes to the white-collar exemptions are finalized.
As noted above, the proposed changes will likely result in nearly five million employees losing exempt status and becoming eligible for overtime.[12] Although the possibility of being paid time and a half for overtime may be appealing to some, we anticipate that a majority of exempt employees reclassified as non-exempt will create a significant morale issue for companies. Exempt employees typically have more flexibility in their schedules to attend personal functions. As a non-exempt employee, they lose that flexibility and would have to clock in and out in order for the company to track their time.[13] Many exempt employees feel a sense of prestige, and the employee may lose morale when converted to a non-exempt and hourly position. A significant decrease in the employee’s hourly rate in order to account for overtime hours without increasing the employee’s salary, as discussed above, would likely also result in a morale issue, even if the employee’s compensation remains the same. The DOL’s proposed changes will significantly affect employers and employees alike.
C. How Companies Should Prepare for the Upcoming Changes.
It is anticipated that the DOL will not likely issue the final rule until July 2016.[14] Preparation for the upcoming changes should begin now. Companies must keep abreast of the latest information regarding when the DOL will announce the final rule. We intend to follow this important decision in this blog.
Strategically, companies should determine the employees who may be affected by the DOL’s change and develop a proposed plan on how the company will handle individual and/or classes of employees, i.e., will their salaries be increased above the DOL salary test to maintain their exempt status or will the exempt employees become non-exempt. If they become non-exempt, the company must decide how it will track employee hours of work; manage overtime (especially where employees receive company email and text messages on their computers and mobile telephones after hours); develop policies for employees to seek prior approval to work overtime; and determine how employees will be disciplined for violating such a policy.
D. Conclusion
The DOL’s proposed white-collar exemptions rule are a significant change from the current regulations and will drastically affect both employers and employees. Although the DOL will not likely issue the final rule for several months, companies should begin preparation now to ensure they are properly prepared to manage the workforce once the regulations take place.
[1] The DOL has also issued major changes to the Highly Compensated Employee exemption. While this is a significant change, it likely will not have the major impact as the proposed changes to the white-collar exemptions.
[2] See 29 C.F.R. § 541(B)-(D), (G). Employees who fail to meet both the duties test and the salary requirement must be paid time and one-half for any hour, or portion of the hour, worked over forty (40).
[3] Michael Petro, Proposed white-collar rules may not have intended effect, Buffalo Business First, Oct. 26, 2015, http://www.bizjournals.com/buffalo/blog/buffalo-law-journal/2015/10/proposed-white-collar-rules-may-not-have-intended.html (last accessed Nov. 16, 2015).
[4] Jeffrey H. Ruzal, U.S. DOL’s Aggressive Moves to Expand FLSA Coverage, The National Law Review, Sept. 24, 2015, http://www.natlawreview.com/article/us-dol-s-aggressive-moves-to-expand-flsa-coverage (last accessed Nov. 16, 2015).
[5] While the DOL did not propose rule changes altering the duties test, it did request comment. Accordingly, there is the potential that the final rule will include a change to the duties test. See Petro, supra note 3.
[6] Philip R. Geist, Upcoming Changes in Federal Wage Law, Ocala Star Banner, Oct. 18, 2015, http://pgeist.blogs.ocala.com/10952/upcoming-changes-in-federal-wage-law (last accessed Nov. 16, 2015).
[7] Id.
[8] See Razal, supra note 4.
[9] For example, an exempt employee currently earns $30,000 per year and averages 50 hours per week. The employee’s current hourly rate is approximately $14.43 per hour. If the employer chose to convert the employee to non-exempt, pay him or her $14.43 per hour, and the employee averaged 50 hours per week, the employer would pay the employee over $40,000 per year. To keep the employee’s pay at approximately $30,000 annually and still average 50 hours per week, the employer would need to move the employee’s hourly rate to approximately $10.50 per hour to account for overtime pay.
[10] Betty Burke Uzee, ABA panel discussion provides insight into the Department of Labor’s proposed rule on the FLSA’s white collar exemptions, Nov. 12, 2015, Lexology, http://www.lexology.com/library/ detail.aspx?g=1543cd12-23a6-40cc-a921-11cc12ec959d (last visited Nov. 17, 2015). Some commentators warn that the salary threshold could increase to approximately $75,000 by the end of 2017.
[11] There are also potential issues with salary compression, i.e., increasing employee x’s salary may require an increase to employee y’s salary.
[12] See Petro, supra note 3.
[13] See Uzee, supra note 10.
[14] See Department of Labor Regulatory Agenda, Fall 2015, http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201510&RIN=1235-AA11; but see Daniel Schwartz, USDOL Final Revisions to White Collar Exemptions Coming in 2016, Nov. 10, 2015, Shipman & Goodwin LLP – JDSupra, http://www.jdsupra.com/legalnews/usdol-final-revisions-to-white-collar-24327 (last visited Nov. 17, 2015) (indicating final rule would not be announced until “late” 2016).