On June 30, 2015 the United States Department of Labor, Wage & Hour Division released to the public proposed regulations for the revision of the Fair Labor Standards Act. These proposed regulation changes were published on July 6, 2015 in the Federal Register. They will be available for public comment until September 4, 2015. At that time they may, or may not, be revised based on comments. A date for implementation of the changed regulations will then be set, most likely early 2016. It is possible they could be effective as early as January 1, 2016 or as late as July 1, 2016. They will certainly be in effect before the 2016 election.
What was changed
What was changed by these proposed regulations was the minimum salary level that has to be paid to a currently exempt employee in order for them to meet the first step in being considered “exempt” from being paid overtime. To understand what was changed let me refresh your memory on what is currently in place.
The current FLSA was last revised in 2004; prior to that the last revision had been 1975. As you all know the world has changed significantly since both those dates and it has been argued that the current definitions and salary levels are out of date. Unfortunately in this go-around only salary levels were changed and not definitions.
The current salary level for an employee to be considered exempt is $455 per week of $23,660 per year. Obviously this is very low; in fact it is below the poverty level for a family of four. In my opinion it was low for 2004. Being paid on a salary basis at that level is the first test of being an exempt employee. This is not a high standard to meet.
The other qualifications for being considered an exempt employee, other than a salary of $455 or more per week, are meeting the duties tests where the employee has to be performing certain duties as defined by their category of exemption. These categories include the executive exemption, which generally includes managers and supervisors; the administrative exemption, which includes white collar positions where the exercise of discretion and independent judgment is necessary; the professional exemption, which includes the learned professional, i.e., doctor, engineer, architect, teacher, and the creative professional, that person who exhibits creativity, imagination, originality or talent; the computer professional; and the highly compensated employee, that individual that earns more than $100,000 and performs some aspect of an exempt duty; and lastly the outside sales representative, that has to meet no salary requirement.
The Proposed Changes
Rather than fixing a single salary level the proposed regulations establish the new salary requirement at the 40% of the weekly earnings of all salaried employees in the United States. By the time this proposal goes into effect that level is anticipated to be $970 per week or $50,440 per year. Quite a change from $455 per week!
This means any currently exempt employee that is earning less than $50,440 will automatically have their exempt status stripped and they will be overtime eligible as of the effective date of the changes.
If you are one of those companies that has a highly compensated employee under the current definition, their $100,000 compensation will now be indexed to 90% of the weekly earnings of all salaried employees and will push them to the $122,000+ level.
In essence this salary level becomes a moving target that will require an evaluation on an annual basis.
What is not changing
There is no proposed change to the duties test, yet. It was the opinion of two knowledgeable professionals that this will yet come but the DOL did not want to present that and the salary change as a double whammy. When, or if, that comes may depend upon the next administration. The DOL however, is soliciting comments on whether changes to the duties test need to be made. They want to know if it is too easy to meet the duties test and be declared an exempt employee. But we will probably not see this until the next round of proposed regulations.
What needs to be done
At the moment NOTHING needs to be changed. These proposed regulations are just that, proposed. Employers do not need to scramble to change anything. However, there are a number of things that should be done to prepare for the inevitable changes that will occur.
First, this would be a good time to review whether or not people you have classified as exempt are really exempt. Too many employers make the mistake of improperly classifying employees as exempt solely on the basis of the fact that they pay them a salary. Salary is a method of wage payment not a classification of overtime eligibility. There are numerous companies that have people classified as non-exempt yet they pay them a salary. Non-exempt employees do not have to be exclusively hourly employees. So even if you have an employee who is going to make the $50,440 salary level they may not be properly classified based on the nature of the duties required to be classified as exempt. If you have questions about a particular employee I can assist you in making this determination.
By the way, titles don’t count. It is all based on the job description and the actual duties performed. If you have not updated your job descriptions lately then you may want to do so by having an incumbent participate in the process. I can also assist you in this process.
Here are the preparation steps that need to occur:
- Identify all current employees that are classified as exempt (not currently eligible for overtime) that are making less than $50,440 per year.
- Determine how close these employees are to that threshold level.
- Determine how many potential overtime hours that employee worked in the past year.
- Calculate the cost of that overtime based on time and a half calculations.
- Determine if it is more cost effective to increase the employee to the $50,440 level or to pay the calculated or anticipated overtime.
- For those employees where it does not make economic sense to raise them to $50,440 it will become necessary for you to determine how you will actually record their time worked, because once these employees are declared non-exempt employees (eligible for overtime) you will have to ACCURATELY track their ACTUAL time worked.
- You will need to institute a system of checks and balances to insure that the behavioral change of tracking time has actually occurred.
- Monitor the annual index to insure the exempt employee remain exempt or whether further adjustments need to be made.
Tracking time accurately of newly re-classified employees will also be important. You can do it old school using paper time sheets or you can do it using new technology, even including mobile devices. The important consideration is finding something your employees will adapt to most easily. I can refer you to any number of providers.
Issues not yet decided
The DOL is seeking input on whether or not to consider nondiscretionary bonuses in the calculation of the total rate of pay. Many companies have a pay system with a portion of the employee’s pay “at risk”, in other words their pay depends on the achievement of goals for which they receive sometimes large bonuses. Currently the proposed regulations do not allow those bonuses to be used to get an employee over that $50 K mark.
An additional issue involves sales positions. Currently inside sales positions have a high hurdle to meet to be considered exempt. A number of companies have said that the realities of the world have changed the nature of sales such that outside sales representatives spend a great deal of time selling via the Internet and may not qualify for the old definition of the sales exemption.
Expressing your opinion
You have a several of different ways to express you opinion on the proposed regulations. First you can comment directly by visiting this site http://www.regulations.gov/#!searchResults;rpp=25;po=50;np=0;dct=N%252BFR%252BPR
and looking for Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.
Secondly, if you are a member of SHRM (Society for Human Resources Management) you can send comments to them. They are collecting comments and will be formulating an HR response to the proposed regulations.
Thirdly, you may belong to an industry group, or Chamber of Commerce, or some other special interest lobbying group who I am sure will be reacting to these regulations. Provide them with your feedback to assist them in their efforts.
You will want to get started sooner rather than later on reviewing which employees may be affected by these changes. The time will pass quickly and if the DOL moves rapidly we could see an effective day as early as January 1, 2016.
Let’s be clear, however, you DO NOT NEED TO START PAYING EXEMPT EMPLOYEES OVERTIME TODAY if they make less than $50,440. You do need to be prepared to do so next year. Today you need to determine to whom changes need to be made and what are the parameters that have to be considered around making those changes.
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