Major Changes To The “White Collar Exemptions” Are Coming Any Day Now – Are You Ready?
Connecticut Law Tribune
April 18, 2016
Employers take notice – the federal Department of Labor (“DOL”) is working on a rule change which will significantly affect employees’ exemption from minimum wage and overtime requirements. The new rule is expected to more than double the minimum salary level required for the “white collar” exemptions to apply. This will likely mean increased costs for employers.
Once the new rule goes into effect, employers will only have a short time to become compliant. The DOL issued the proposed version of the rule last fall, and the final version is widely expected to be announced as early as this spring. If this happens, employers would need to be compliant by this summer! This will be a drastic change, and there will not be much time to implement it.
WHAT DOES THE LAW CURRENTLY REQUIRE?
The Job Duties Test
The federal Fair Labor Standards Act (“FLSA”) requires most employees be paid a minimum wage for all hours worked. It also requires an overtime rate of one and a half times an employee’s regular rate of pay for all hours worked over 40 hours in a workweek. However, there are exceptions. One such set of exceptions – commonly referred to as the “white collar” exemptions – exempts certain classes of professional workers from the minimum wage and overtime requirements of the FLSA. The test to determine whether an employee qualifies under one of these “white collar” exemptions has two prongs. The employee’s job duties must fit one of the following five categories:
- Executive – The employee must primarily manage the enterprise (or a customarily recognized department or subdivision), customarily and regularly direct the work of two or more full time employee equivalent workers (in other words, must supervise them), and have the authority to hire and fire other employees (or at least have his/her recommendations given strong weight);
- Administrative – The employee must primarily perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. The employee must also be able to exercise discretion and independent judgment;
- Professional – The employee must be either a:• Learned Professional – The employee must perform work requiring advanced knowledge in a field of science or learning which is customarily acquired by a prolonged course of specialized intellectual instruction; or
• Creative Professional – The employee must primarily perform work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
- Computer Employee – The employee must be a computer systems analyst, computer programmer, software engineer, or similarly skilled worker performing certain specialized types of work which are delineated by the DOL; or
- Outside Sales – The employee must primarily make sales or obtain orders or contracts for services or for the use of facilities. He/she also must be customarily and regularly engaged away from the employer’s place or places of business (the more time spent away from the place of business, the better).
The Salary Test
In addition, employees who fit into any of these categories except “Outside Sales” must ALSO be paid at least $455 per week (computer employees may instead be paid at least $27.63 per hour). An employee who fits one of the above categories but is paid less than $455 per week (with the exception of outside salespeople) is not exempt and must still be paid minimum wage and overtime as appropriate. Also, if an employee only performs a few of the “duties” listed above, he/she can still be deemed exempt if they are paid over $100,000. It is the Salary Test which the DOL proposes to change.
WHAT DOES THE NEW RULE REQUIRE?
Under the new rule, you must pay your white collar exempt employees a much bigger salary. Under the new rule, the required minimum salary level will grow to $970 per week (from $455 per week). This is over $50,000 per year! Additionally, “Highly Compensated Employees” – those who meet only part of the duties test for one of the above categories but were previously exempt if their compensation was more than $100,000 annually – must now be paid at least $122,148. As a result of these rule changes, observers expect approximately five million more employees will be eligible for overtime because their salaries are just too low.
Part of the reason this change seems so jarring is because inflation outpaced the minimum salary level long ago. Prior to the proposed change, the threshold had only been updated once since 1975. To avoid a recurrence of this problem, under the new rule, the minimum salary level will be annually updated either by tying it to the 40th percentile of earnings for full-time non-hourly workers (to be determined using data from the United States Bureau of Labor Statistics) or using the Consumer Price Index (the final rule is expected to lay out which of these methods will be adopted).
While the proposed rule did not include changes to the duties test, the DOL sought comments regarding possible changes to the duties test “for consideration in the Final Rule.” It is not procedurally clear if the DOL can implement such a change, but here is what might happen. There is currently no bright line for how much time an employee must spend performing exempt work for it to be his/her “primary duty.” Employees can sometimes be considered exempt even if only ten or twenty percent of their time is spent performing the duties in one of the above categories. The DOL sought comment on issues including whether employees should be required to spend a minimum amount of time performing their primary duty. The DOL specifically asked whether it should consider using California’s rule – under which employees must spend at least fifty percent of their time exclusively performing their primary duty. Therefore, at some point, we might see changes to the duties test; time will tell.
WHEN WILL THE NEW RULE TAKE EFFECT?
The new rule has been in the works since the spring of 2014, when President Obama instructed the DOL to update and modernize the White Collar regulations. This project has turned out to be more of a challenge than the Administration expected. For example, when the DOL unveiled a proposed version of the rule in the summer of 2015, it received 250,000 comments from members of the public.
At long last, we have a real idea of when the final rule can be expected. The Department of Labor submitted it to the Office of Management and Budget (“OMB”) on March 14, 2016. A subdivision of OMB, the Office of Information and Regulatory Affairs (“OIRA”), reviews agency rules before they are issued. This is one of the last phases before a rule is made official. The OIRA could conclude its review in as little as a month. The DOL has previously indicated it expects the new rule will go into effect 60 days after it is released. Therefore, employers may need to become compliant with the increased overtime threshold as soon as this summer.
WHAT SHOULD EMPLOYERS DO?
Given how quickly the final rule will go into effect, employers should put a plan together now. The following is an overview of what employers might want to consider.
First, employers should evaluate the exempt status of their employees to ensure they are properly classified. If you lack the expertise in-house, consider retaining counsel to perform a full Wage and Hour Audit. Assuming you have employees who fit the duties test but whose compensation is below the new minimum salary level, you have several options, all of which are likely to prove very costly:
- Raise the employees’ compensation to the new minimum salary level. Considering the old threshold was $23,440 annually, this could more than double the employees’ cost to you;
- Convert the employees to hourly compensation. The cost of this option all depends on how many hours the employees works. If the employees work considerably more than 40 hours per week, this option will be very expensive because you will need to pay time and a half for all hours worked over 40 in a workweek; or
- If option two above is too expensive based on hours worked, you could hire additional employees so no one works more than 40 hours per week. The wisdom of this option depends on your particular facts.
Based on the new law, increased costs are unavoidable. Beyond the cost, you need to determine how best to explain the changes to your employees. Those who just get more salary will of course be happy, but what about the others? Some will consider being converted to hourly pay a “demotion” because they view being salaried as a status symbol. Others may be upset they were previously not compensated for their overtime. You know the dynamics in your workplace better than anyone – you will need to “take the temperature” of your workforce and proactively create a plan. How you explain this change could make the difference between a major upheaval and a non-event.