The Department of Labor (DOL) recently announced proposed changes to regulations implementing the Fair Labor Standards Act (FLSA), specifically the overtime exemption that allows certain employees to be paid a salary without overtime pay. These changes could significantly impact labor costs for employers in all sectors. The upcoming final rule will have an important impact on employers’ operating plans and budgets.
The FLSA broadly defines two types of employees: exempt and nonexempt. In general, exempt employees have “white collar” job duties—executive, professional, or administrative—and are paid at least $23,660 per year ($455 per week), regardless of the number of hours worked each week. Interestingly, teachers are classified as professionals and are therefore exempt from overtime requirements, but the salary test does not apply to teachers.
Employees who have the proper job duties and who are paid a set salary consistent with the governing regulations are “exempt” from the FLSA’s requirements for minimum wage and overtime pay, in contrast to nonexempt workers. Nonexempt employees must be paid at least minimum wage, as well as an overtime rate for all time worked in excess of 40 hours in a single work week. The required overtime rate is generally not less than time and one-half an employee’s regular rate of pay.
The DOL is proposing to increase the salary requirement for exempt employees, using as a benchmark the 40th percentile of weekly earnings of full-time salaried workers. For 2016, the estimated salary requirements would be $970 per week, or $50,440 per year. The proposed changes also include a methodology for automatically increasing the salary requirement to reflect ongoing economic developments.
Trade organizations such as the Society for Human Resource Management (SHRM) have expressed concerns over the proposed salary rules, asserting that the changes would have substantial and potentially disruptive effects on nearly every employer in the country. SHRM concedes that an adjustment in the threshold salary level is appropriate, but contends that the proposed increase is too large for business owners to absorb in a short period of time. Of special concern is the impact on nonprofit organizations because the salary levels for nonprofits are traditionally lower than in other sectors of the economy. Additionally, variations in regional compensation amounts mean the new regulations would impose a heavier burden on some areas of the country than on others.
No one can say with certainty how the proposed changes will translate into a final rule, but educated predictions are possible: Any changes will not be effective as of January 2016, but a final rule is expected before the election in November of 2016. While an increase in the salary requirement is likely, the DOL will reduce the amount from its initial proposal. Finally, the DOL will allow some grace period before enforcement of the new rule begins.
Even with this uncertainty, employers can prepare now for expected changes. First, employers should review the job duties of all employees classified as exempt to determine if the FLSA regulations actually allow the exemption.
Second, employers can require all employees—both exempt and nonexempt—to keep records of their hours worked. If exempt employees are commonly working more than 40 hours per week, the employer has three potential courses of action once the final rule is in place: (1) Increase salaries to meet the new salary test; (2) Reclassify employees as nonexempt and pay overtime for all hours worked in excess of 40 hours in a single work week; or (3) Reclassify employees as nonexempt and forbid them from working overtime.
Nevertheless, if an employer knows or should know that an employee has worked more than 40 hours in a single work week, the employer is obligated to pay the resulting overtime. An employee can be disciplined for working too many hours, but overtime must still be paid for those excessive hours.
As always, building a trusted team of advisors may be the best defense for ensuring a correct reading of the law and determining the most financially sound means of compliance.