New FLSA Exemption Rules Finally Arrive

The U.S Labor Department (USDOL) has finally released the anxiously awaited revised regulations affecting certain kinds of employees who may be treated as exempt from the federal Fair Labor Standards Act’s (FLSA) overtime and minimum-wage requirements. These will be published officially on May 23, 2016.

If you currently consider any of your employees to be exempt “white collar” employees, you might have to make some sweeping changes.

Summary of Changes

In brief, the following changes will be made in USDOL’s definitions of executive, administrative, professional, computer-employee, and highly compensated exemptions under the FLSA’s Section 13(a)(1):

• The minimum salary threshold is increasing to $913 per week, which annualizes to $47,476 (up from $455 per week, or $23,660 per year). USDOL says that this figure is set at the 40th percentile of data representing what it calls “earnings of full-time salaried workers” in the lowest-wage Census region (currently the South).

• This amount will now be “updated” every three years (meaning that it will likely increase with  each “update”), beginning on January 1, 2020. USDOL will announce these changes 150 days in advance.

• Employers will be able to satisfy up to 10% of this new threshold through nondiscretionary bonuses and other incentive payments, including commissions, provided that the payments are made at least quarterly. This crediting will not be permitted as to the salaries paid to employees treated as exempt “highly compensated” ones.

• The total-annual-compensation threshold for the “highly compensated employee” exemption will increase from $100,000 to $134,004 (which will also be “updated” every three years). USDOL says that this figure is set at the 90th percentile of data representing what it calls “earnings of full-time salaried workers” nationally.

These rules will become effective on December 1, 2016, which is considerably later than had been thought. Unless this is postponed somehow, you must do by this time what is necessary to continue to rely upon one or more of these exemptions (or another exemption) as to each affected employee, or you must forgo exempt status as to any employee who no longer satisfies all of the requirements.

The Bottom Line

Essentially, USDOL is doubling the current salary threshold. This is likely intended to both reduce the  proportion of exempt workers sharply while increasing the compensation of many who will remain exempt, rather than engaging in the fundamentally definition process called for under the FLSA. Manipulating exemption requirements to “give employees a raise” has never been an  authorized or legitimate pursuit.

For the first time in the exemptions’ more-than-75-year history, USDOL will publish what amounts to an automatic “update” to the minimum salary threshold. This departs from the prior USDOL practice of engaging in what should instead ultimately be a qualitative evaluation that also takes into account a variety of non-numerical considerations.

USDOL did not change any of the exemptions’ requirements as they relate to the kinds or amounts of work necessary to sustain exempt status (commonly known as the “duties test”). Of course, USDOL had asked for comments directed to whether there should be a strict more-than-50% requirement for exempt work. The agency apparently decided that this was not necessary in light of the fact that “the number of workers for whom employers must apply the duties test is reduced” by virtue of the salary increase alone.

What Should You Do Now?

Some in Congress are still considering action aimed at stopping these changes, and it is possible that lawsuits will be filed with the same goal. While one or more of these challenges may be successful, you should assume for the time being that the new requirements will take effect as scheduled.

Right now, you should be:

• analyzing whether the requirements for the “white collar” exemptions you have been relying upon are met
• evaluating what might be changed about one or more jobs so that the incumbents may be treated as exempt in the future
• considering the possible application of alternative FLSA exemptions, and
• developing FLSA-compliant pay plans for employees who have been treated as exempt but who no longer will be.

USDOL has provided extensive commentary explaining its rationale for the revised provisions. We are continuing to study the final regulations and accompanying discussion carefully and will provide updates/changes as published.

Prepare for Imminent FLSA White-Collar Regulations

While waiting for the pending issuance of the proposed Fair Labor Standards Act (FLSA) white-collar regulations, employers can begin taking some steps now to prepare.

Many believe the proposed regulations will be issued in March, although the proposed regs haven’t been sent yet to the Office of Management and Budget.

It is rumored that California’s quantitative duties test may be applied to the FLSA executive exemption, which would require employees to spend at least 50 percent of their time in exempt work in order to be classified as exempt. An adviser stated they would be surprised if thequantitative duties test was limited to the executive exemption and feel it might be applied as well to the administrative and professional exemptions.

Employers may begin doing an analysis now on their exempt population and how this change would affect them.

For many companies, some classes of employees are nonexempt in California, but exempt in the rest of the country. That may change with the new rule as well, if California’s quantitative duties test is applied across the nation.

Five Key Steps 

Various legal counsel recommends five key steps employers should take now in anticipation of the revised overtime regulations:

1. Determine whether you have current job descriptions that accurately reflect job duties and convey the core functions and responsibilities of each role, particularly for exempt positions. Ideally, job descriptions for exempt employees should demonstrate to a reader not familiar with the company—e.g., a DOL [Department of Labor] investigator or a plaintiff’s lawyer—exactly why a role is exempt in clear,straightforward language.
   
2. Identify, under advice of counsel to maintain attorney-client privilege, currently exempt positions that may be in the gray zone between clearly exempt and clearly nonexempt. These roles may present the most immediate concern if, as anticipated, the new regulations significantly narrow the exemptions. This may include positions whose salary is toward the lower end of the exempt spectrum, as well as jobs where the employees may engage in a large amount of arguably nonexempt activity.
3. Make sure business leaders have an understanding that these proposed regulations are coming and that they will have a potentially disruptive effect on the business. Also, business leaders should understand the rules may end up in limbo for several months or more in the event of congressional pushback or litigation. The potential for having to reclassify a large number of employees from exempt to nonexempt may require examining compensation to find alternative ways to incentivize the desired job behaviors, addressing potential benefits consequences and anticipating morale and other employee relations effects. Moreover, employers should know to expect a comment period, followed months later by what will presumably be a final rule that may differ in numerous important respects from the version that appears in the notice of proposed rulemaking.
4. Begin developing contingency plans for how the business will respond if the minimum salary threshold increases substantially to $40,000, $50,000 or even $60,000. If the salary threshold for exempt status lurches sharply upward, businesses may face a tough choice regarding whether to award employees an outsized raise in order to maintain exempt status or, instead, to convert roles to nonexempt status.
   
5. Figure out what the company’s approach will be in establishing work schedules and pay rates for employees converted from exempt to nonexempt. Will the approach be to pay people hourly or to use a salary plus overtime? Will the new pay rates attempt to replicate the employee’s pre-conversion earnings and schedule, such that employees who worked, say, 45 or 50 hours a week pre-conversion will continue to work those hours and now receive premium overtime pay? Or will there be a desire to avoid the heavy marginal cost of the overtime hours, leading the business to adjust employee schedules down to 40 hours, to reduce their overall earnings accordingly and to hire additional head count to cover the workload?

Employers should begin now by talking to the managers or supervisors responsible for these exempt employees to determine the actual job duties for the employees as opposed to the stated job duties, because it’s the facts that matter most.

Employers need to know their workforce and be proactive. They should identify those exempt positions whose classification barely meets the FLSA minimum qualifications for a white-collar exemption under either the duties or compensation components. If either the duty or salary component is affected by regulatory changes, employers will know these identified positions will be targeted first.

The more lead time that a business has to grapple with these issues, the more satisfactory the process and the outcome will be for everyone.