Common exemptions from FLSA coverage are the so-called “white collar” job classifications for: (1) executives; (2) “administrative employees”, i.e., those whose duties primarily include office work that is directly related to the employer’s business operations and requires the regular exercise of independent judgment and discretion; (3) professionals; (4) computer professionals; and (5) and outside sales employees. However, whether a particular job classification is truly exempt depends on more than an employee’s duties or an employer’s title for a particular job position; the inquiry begins with an employee’s annual salary. FLSA exemptions are highly regulated and litigated—and, aside from being dense, these regulations can also be dynamic.
USDOL’s rule changes are expected to go into effect as early as July 2016. Many employers are scrambling to prepare for the effects that the “Final Rule” will have on employee compensation plans because the new regulations will boost the minimum annual salary needed to trigger FLSA’s white collar exemption from overtime pay. The current threshold is expected to increase from $23,660 to $50,440. This means that employees currently earning less than $50,440 will no longer be “exempt” from the overtime pay provisions under FLSA. By USDOL’s own estimate, some 5 million currently exempt workers in the United States will become eligible for overtime pay under the Final Rule.
It is therefore unsurprising that, when the new regulations were first proposed last year, USDOL received more than 250,000 comments. Many commentators pushed for a delay in the effective date of the regulations, citing the need for time to make operational adjustments, including reevaluating employees’ job classifications, duties, work schedules, and compensation plans. Commentators also responded to USDOL’s request for comments on possible changes to the “duties test.” This request—given that USDOL’s proposal did not itself suggest any changes to the duties test—was rather surprising.
In addition to meeting the salary threshold, the current duties test also requires that the “primary” job duties of exempt employees fall within one of the white collar job classifications. Possible changes to the current test are uncertain; however, one possibility is that USDOL could adopt a version of the duties test similar to the test used in California. At a high level, the key distinction between USDOL’s current test and the California test is best described as quality versus quantity. Under California’s strict quantitative standard, exempt employees must be “primarily engaged in” exempt job duties by spending more than 50% of their time performing them. In contrast, the general rule under USDOL’s more qualitative test is that exempt employees must perform exempt duties at least 50% of the time. Moreover, in certain circumstances, employees spending less than 50% of their time on exempt work can still satisfy the primary duty requirement under the current rule.
Whatever the Final Rule might have in store for the duties test, the breadth of the anticipated increase to the overtime salary threshold by itself should nevertheless have employers thinking seriously about something: employee reclassification. Proper classification is critical because, as some employers know all too well, misclassifying employees as exempt under FLSA can be a costly mistake. For example, in 2012, behemoth retailer Wal-Mart paid out $4.8 million in back wages to more than 4,500 managers who were misclassified as exempt from FLSA overtime requirements. In 2014, home improvement retailer Lowe’s paid $9.5 million to settle a class action filed by its HR managers alleging they were misclassified. And last September, USDOL auditors found that Halliburton, the oil field solutions giant, had misclassified some 28 job positions as exempt and required the company to pay out $18.2 million in overtime owed to more than 1,000 employees.
For smaller businesses, dates with USDOL auditors or protracted litigation with employees can have serious, if not calamitous, effects on finances and operations. Now is the time to take that critical step to reassess your employee compensation plans. Below are a few tips to keep in mind that can help lessen compliance risks while keeping costs to a minimum:
- Review Employee Classifications. Employers should understand their employees’ compensation structures and job classifications—as well as the differences between exempt and nonexempt status under the FLSA. Remember that under the Final Rule, employees earning less than $50,440 are most likely to be nonexempt and thus eligible for overtime pay. Try and forecast the impact of anticipated reclassifications on future operating costs and plan accordingly. Evaluate the job duties of all employees and don’t forget about the uncertainty surrounding potential changes to the duties test.
- Check Employees’ Hours. Employers can reduce the impact of the Final Rule by staying abreast of the number of hours employees work each week. Consider any of the various tools that exist to help employers make informed staffing choices. Some of these tools provide automated time and attendance systems that perpetually track hours worked. Such systems can automatically alert you whenever an employee is closing in on working 40 hours in a given workweek. An early alert might give you the extra time you need to make informed scheduling changes before the work week ends.
- Consider Hourly Pay. For employees who often work less than 40 hours per week, consider converting them to nonexempt, hourly status. This can give you the scheduling flexibility you need. However, you still need to proactively monitor hourly employees’ work schedules to ensure compliance with overtime rules. Additionally, consider how this change might affect deductions, time off, and other aspects of employment and compensation. Remember to communicate any changes to employees in advance and consider how employees may perceive these changes.
- Decrease Costs by Paying More. Particularly for small businesses, raising the salaries of employees who regularly work more than 40 hours per week above the $50,440 overtime threshold can decrease costs in the long run. However, this strategy should be carefully thought out. Of course, you will need to review the relevant regulations and audit current job responsibilities to ensure that the employees will actually qualify for the exemption. Also be sure to consider how a given employee’s increased salary would compare to the overtime costs that you estimate would otherwise apply once the Final Rule goes into effect.
All that said, you may have heard that federal legislators have introduced a bill which, if passed, would push the effective date of the Final Rule into 2017. Don’t count on it. “The Workplace Advancement and Opportunity Act” (H.R. 4773 and S. 2707) (“the Act”) reflects legislators’ concerns that USDOL failed to account for a variety of negative factors, including the harsh effects on small businesses, non-profits, and lower-wage industries; as well as regional cost-of-living and salary differences, the curtailing of workplace flexibility, and the compliance costs now facing employers. Whatever Congress might think about USDOL’s rulemaking abilities, employers are nevertheless well advised to continue proactively addressing compliance issues. Even if the Act passes in both the House and the Senate, it will likely face a presidential veto, which can only be overridden by a two-thirds majority vote in both chambers of Congress.
Meanwhile, the rulemaking process presses onward. On March 14, 2016, USDOL submitted its final proposals to the Office of Management and Budget (“OMB”)—a necessary last step before any new regulations can be finalized. OMB review typically takes anywhere from 30 to 90 days, so a Final Rule could issue as early as May or perhaps as late as July. The sooner you take the time to review employee classifications, staffing systems, and compensation plans, the better. Navigating these regulations will take time. But being proactive now rather than reactive later is, in most cases, better for business.