Published in the NH Bar News (4/20/2016)
In response to a 2014 directive from President Barack Obama, the US Department of Labor (DOL) last June proposed an update to regulations that define which white collar workers are protected by the Fair Labor Standard Act’s (FLSA) minimum wage and overtime standards. These changes are expected to affect millions of workers across all industries.
Coverage of the FLSA is broad: most businesses are covered, including nonprofit organizations. For a covered business to be exempt from paying overtime to its employees, current regulations require that each of three tests be met: (1) the employee must be paid a fixed salary; (2) the amount of the salary must meet a minimum amount (currently $455 per week); and (3) the employee’s actual job duties must primarily involve executive, administrative, or professional duties, which are defined by the FLSA.
The DOL issued proposed rules that included an increase in the minimum salary for employees to qualify for the “white collar” FLSA exemption tests for the administrative, executive, learned professional and computer exemptions. The proposed increase in minimum salary for these exemptions would go from the current $455 per week ($23,660 per year) to $970 per week ($50,440 per year). The current minimum salary represents less than the poverty threshold for a family of four. Whereas, the new minimum salary represents the 40th percentile of earnings for all full-time salaried workers throughout the United States.
The DOL is also proposing to increase the minimum salary that an employee must earn to meet the “highly compensated” exemption, from $100,000 to $122,000, which is tied to the 90th salary percentile. The DOL has also recommended that the salary amounts be increased annually, tied either to the Consumer Price Index or the Current Population Survey. This means employers may need to modify their payrolls each year to ensure their employees are properly classified as exempt.
Businesses often believe erroneously that if they pay an employee a salary, the employee is not eligible for overtime pay; that is not always accurate. The FLSA controls which employees are exempt from overtime, according to its exemption categories. If the employee’s wages and actual job responsibilities do not fit within an enumerated exemption, he or she must be paid overtime for time actually worked over 40 hours in a work week.
Although written job descriptions may appear to support classification of an employee as exempt, it is the actual duties performed on a daily basis that count. It is important to note that when conducting an audit of a business, the DOL does not rely on job descriptions, but meets with employees to learn what their actual job duties are. That information forms the basis of the DOL’s determination as to whether an employee’s actual job duties meet one (or more) of the FLSA exemptions.
Workers who meet the duties tests (described below), but no longer meet the new salary basis will no longer meet the exemption and must be paid overtime under the proposed changes.
To qualify for the administrative exemption under the FLSA, for example, all of the following tests must be met:
- The employee must be compensated on a salary basis ($455 per week changing to $970);
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Case Study
A business would experience the impact of the proposed changes to the regulation in the following situation. Acme Marketing Company employs five individuals, including a full-time employee, Mabel, whose job responsibilities include bookkeeping and human resources. Mabel often works 50 hours a week, sometimes from home via remote access. Mabel receives a salary of $800 per week or $41,600 per year and is considered exempt from overtime under the FLSA’s administrative exemption.
Under the proposed regulations, Mabel would no longer be considered exempt because she does not earn the requisite $970 per week. Acme has several options: (1) increase Mabel’s salary so that she meets the minimum salary test; (2) continue to pay her current salary, along with overtime; or (3) continue to pay her current salary, but prohibit overtime (although it must be paid if she works any time over 40 hours in a week) and hire a part-time employee to work 10 hours a week at a lower hourly rate.
Even though a business owner might agree in principle that the changes to the regulations are overdue, the company might not have the financial means to accommodate these changes. For example, a small nonprofit organization that mainly receives grant money will find it difficult to comply with the new regulations.
The DOL estimates that the new regulation will eliminate the exempt status for approximately 21.4 million employees. In addition, the proposed rule will have more of an impact on certain geographical regions and industries, in particular retail and hospitality.
Potential Timing of the Changes
The proposed changes have not been implemented yet, but it is expected that they will go into effect by the end of this year. The DOL has submitted for review the final revisions to the Office of Management and Budget (OMB), which is the next step in the adoption of the new regulations.
The normal expectation is that the OMB must complete an assessment within 90 days. Once the final rule is published in the Federal Register, it will take effect within 60 days. Some estimate that the rule might be published by July 7, and take effect on Labor Day, Sept. 5.
Alternatively, the rule might be published the Friday before Labor Day, Sept. 2, to take effect Nov. 1 – just before Election Day. It is important that businesses take the opportunity now, while not under pressure, to conduct wage audits, review wages scales and handbook policies, to identify employees whose status may change to non-exempt and prepare for any financial impact.
Beth Deragon is an attorney in the employment law practice and litigation group at McLane Middleton. She can be reached at beth.deragon@mclane.com or (603) 628-1490. She also contributes regularly to www.employmentlawbusinessguide.com.