On May 18, 2016, the United States Department of Labor announced its final determination with regard to President Obama’s Directive to “update and modernize” the regulations governing the exemption of executive, administrative and professional employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act (“FLSA”). Employers have been watching this rule change process carefully, as the new regulations will now require employers to track employee hours with greater accuracy and require them to be particularly careful in properly classifying individuals presently paid a salary. Though the new regulations were announced May 18, 2016, the effective date of the final rules is not until December 1, 2016. Thus, employers have just over six months to review their circumstances and make any and all appropriate adjustments.

Key Components of the New Regulations

The goal of the FSLA is to ensure minimum wage and overtime protections for most employees. However, those employees who constitute bona fide executive, administrative or professional (“EAP”) employees are exempt from some of these protections. The tests to determine whether an employee is exempt date back roughly 75 years and variously focus on the amount of an employee’s predetermined or fixed salary not subject to reduction because of variations in quality or quantity of work (the “Salary Basis Test”); the amount of salary that is paid that meets a minimum specified level (the “Salary Level Test”); and the determination of whether an employee’s job duties primarily involve executive, administrative or professional duties as defined by the regulations (the “Duties Test”). The Department of Labor last updated most of these regulations in 2004. At that time, the minimum weekly salary level required in order to qualify as an exempt employee was set at $455 (or $23,660 on an annual basis). The Department of Labor determined that this level of compensation could no longer accurately or reasonably be tied to bona fide EAP functions, and thus revisited the various classifications. Much of this interest and attention was generated in substantial measure by a number of managers in the fast food and similar industries performing essentially the same duties as the individuals they supervised, yet earning little more in income while at the same time being exempt from any entitlement to overtime.

Starting December 1, 2016, the standard salary level required for EAP workers to be exempt from entitlement to overtime is set to what the Department determined was the 40th percentile of earnings of full-time salaried workers, which is $913 per week (or $47,476 annually). The Department thus more than doubled the exemption salary level. In addition, the existing exemption for highly-compensated employees subject to a certain minimal-duties test had previously been $100,000 annually. As of December 1, 2016, that highly-compensated employee level will instead equate to the 90th percentile of full-time salaried workers nationally, which the Department set at $134,004 annually. The final key provision of the new rules which will go into effect later this year is a mechanism established by the Department Labor to automatically update the salary and compensation levels every three years to adjust the income levels at the 40th and 90th percentiles. There will thus not be another 12 year delay in revisiting these numbers.

Practical Implications for Employers

The Department of Labor estimates that the changes described above will extend the right to overtime pay to an estimated 4.2 million workers who are currently exempt. Other sources place this estimate quite a bit higher. All employers will need to take stock of their compensation plans between now and December 1st in order to ensure compliance. First steps should be the following:

Review the classifications and circumstances of your exempt or salaried employees. It is important to thoroughly understand the job duties and functions of each position. Employees earning in excess of $47,476 per year should still be exempt, so long as the position is required to perform primarily executive, administrative or professional duties. If the level of wages for employees, even those performing EAP duties, is not above the new threshold, they will likely no longer continue to qualify as exempt and will be eligible for overtime. This will require most employers to review the classification of all of employees, particularly those earning less than the new minimum salary level for exemption.
Closely manage and monitor employee hours. To the extent employers have not carefully monitored the number of hours employees work in the past, the new rules should provide greater incentive going forward. Overtime is likely to be available to many more employees, and accurately tracking those hours, as well having rules in place that govern when employees are authorized to work overtime is a logical first step. Some employers may even consider implementing automated time and attendance systems that could track hours worked by employees more closely and even send managers alerts when employees near the 40-hour per week threshold.
Convert salaried employees to hourly. For a number of employees who had previously been salaried, it will in all probability make sense to convert them to non‑exempt hourly status and pay them for any overtime they incur. This is particularly so for any employees earning less than $47,476. Employers will have a corresponding obligation to monitor each employee’s hours to ensure accurate pay and adherence to the FLSA’s minimum wage and overtime requirements. This is also a good time to consider how any such changes might affect various deductions, PTO and other vacation time, as well as other aspects applicable to your particular workplace.
Consider increases in wages. This sounds somewhat counterintuitive, but for employers who have salaried employees earning just under the $47,476 threshold, who meet the tests for bona fide EAP employees, it may make sense to offer salary increases, particularly to those employees who regularly work more than 40 hours per week. Doing so would obviously require a careful review of job duties and classifications to ensure that an employee, even earning more than the standard salary level, falls within the exemption.

Risk Management

Even when employers take steps to comply with the new regulations, some commentators anticipate that employers can nevertheless expect a significant increase in litigation brought against employers challenging overtime and exempt classifications. Many employers will struggle to comply in a timely fashion. These cases have always been costly; they are about to get more so. In addition to the new rules governing minimum wage and overtime, employers are also confronting a widespread change around the country involving increases to minimum wages as well as much greater regulatory attention to the distinction between employees and independent contractors. The confluence of all of these issues could create a perfect storm for potential litigation for employers who are not ready for the changes.

As you review your employment classifications and your exempt employees heading toward December 2016, please don’t hesitate to reach out with any questions you might have with regard to the new regulations or any other aspect of employment law compliance for your company.