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Salaried No More? Government to Announce $50,400 Exemption Threshold

We have previously written about President Obama’s plan to modernize regulations governing the executive, administrative, and professional exemptions (“White Collar” exemptions) from minimum wage and overtime.  Last year, President Obama signed a Presidential Memorandum instructing the Department of Labor “to propose revisions to modernize and streamline the existing overtime regulations.”   The DOL’s proposal was originally expected in November 2014, but was delayed until 2015.  A key part of this overhaul was expected to be an increase of the minimum amount of money an employee must earn to be eligible for salaried exempt (from overtime) status.  In a blog post written by President Obama on the Huffington Post  in late June, he finally revealed the extent of this increased threshold: from roughly $23,600 to more than double – $50,400!

This change is jarring because the threshold was so low for so long – it has only been raised once since 1975.  As a result, the threshold was long ago outpaced by inflation, which meant employers were able to employ many salaried workers at a rate significantly less than intended by the original drafters of the law and regulations.  This huge saving opportunity for employers is now gone!

As a result, employer may have to address both economic and emotional issues.  On the emotional side, some employees will be very happy that their wages will dramatically increase.  Unfortunately, these same employees may wonder why they were so “low paid” for so long?  On a completely different level, some employees will be insulted if you convert their current salary to an hourly rate and explain that these employees must now “punch a clock” – even if they get overtime!  For many salaried workers, it is a badge of honor not to punch a clock.  Regardless of the positive economic consequences, this change may be insulting, and the employer may be blamed!   Navigating this emotional highway can be surprisingly difficult.

On the economic side, you will likely need to implement changes to your business plan.  The old salary exempt system saved money for employers whose managers worked extended hours at minimum thresholds.  With the new increased salary requirement, your costs will have to be reviewed.  A few options immediately come to mind.  First, give these exempt employees enough of a raise to keep their exempt status.  Alternatively, convert these employees’ salaries to an hourly rate.  As long as this is above minimum wage, it will work, but if they often worked overtime, the costs may increase dramatically.  If the overtime component is too great, employers could hire more employees to avoid incurring overtime pay (but certain other costs will increase, such as payroll taxes which are only applied to the first certain level of pay received by the employees).  While this may help minimize the costs, the result may be raging discontent within your business – resulting in more employee complaints to each other, the press, customers, governmental agencies and even unions.  None of this will be good.

So what should you do; it depends on your unique circumstances.  Do the analysis and determine if and how the new minimum threshold will affect your business.   Than evaluate your alternatives.  Whatever you decide, be sure to recognize the likely reaction of your employees.  Don’t disregarding these new requirements and don’t pretend your employees won’t care.  Take the bull by the horns, openly discuss the impact on your business and your employees and actively manage the reaction.

Also recognize that some industries will be more affected than others.  For instance, we anticipate that quick service restaurants and the retail industry will be forced to reclassify substantial numbers of employees or redo their compensation rates.  Nevertheless, all businesses will need to reexamine their employees’ status to ensure they are properly classified.  This is especially so because more details of the DOL’s proposal will soon be released, and some of these changes may be more fundamental and intricate than simply raising the threshold salary.  This is a perfect time to consider a Wage and Hour Audit to help you determine proper classification for your employees.  We will keep you posted as the specific terms of the new regulations become public.

Brody and Associates regularly advises management on complying with the latest state and federal employment laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.