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What Do Dinosaurs and Your Salaried Employees Have In Common?

Increasing the minimum wage for federal contractors is not the only change President Obama is looking to make to federal wage and hour laws.  Recently, the President signed a Presidential Memorandum (“Memorandum”) directing the federal Department of Labor (“DOL”) to modernize regulations governing the executive, administrative, and professional exemptions (“white collar” exemptions) from minimum wage and overtime.  This may mean that exemptions from minimum wage and overtime for lower-paid exempt employees become extinct like the dinosaurs.

Generally, employees who perform certain “duties” and make a salary of at least $455 per week or roughly $23,600 per year (the duties and salary tests), are exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (“FLSA”).  Many people, including the President, believe the salary thresholds for these exemptions are unreasonably low, even after being raised in 2004.  The President has observed the exemptions were meant for highly-paid individuals and not those making as little as $23,600 a year.  Although the Memorandum suggests changes should be made to both the duties and salary tests, the salary test appears to be the President’s focus.  Although no dollar amount was suggested in the Memorandum, commentators believe the proposed regulations may raise the salary threshold as high as $900 or $1,000 per week.

If the concept of the exemptions is to capture only highly-paid employees, it makes sense to raise the salary threshold.  However, this will have a dramatic impact on employers who may be forced to restructure their workforce.  If the weekly salary requirements for employees increases, employers will be forced to either increase the pay of salaried employees; change these salaried employees to hourly and pay minimum wage and overtime; or change these salaried employees to hourly, hire additional employees, and reduce all hours to 40 or less to avoid paying overtime.  This also may involve cutting the hourly rate of these salaried employees when they lose their exempt status so their total compensation remains closer to their current level.

Under the current system, many businesses reward hard-working, responsible employees who are willing to put in extra hours by making them salaried and paying them more money than they would receive if they were hourly.  If new regulations force employers to double the salaries of these employees, employers may be forced to make these employees hourly and not reward them with salaried positions.  Worse yet, the employer might hire two workers to replace the one worker who previously worked a lot of hours in order to avoid the burden of overtime.  Thus, this law could hurt the people it is intended to help.

Again, this Memorandum does not change the law.  It simply directs the DOL to propose regulations that may change the law in the future.  The DOL is expected to issue regulations this fall; we will keep you apprised of their progress.

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