Articles

Aaron Kolquist

Employers Beware: Upcoming Changes Regarding FLSA Employee Exemptions

The U.S. Department of Labor (DOL) has proposed to amend certain provisions of the Fair Labor Standards Act (FLSA), including an amendment that will more than double the minimum salary level required for employees to be exempt from minimum wage and overtime protection.  Ready or not, the DOL expects to finalize and publish the amended regulations by July 2016 and, barring any Congressional intervention, the regulations are expected to take effect 60 days thereafter.  It is imperative that employers understand the proposed changes and the consequences involved so they can adjust their practices accordingly.

Background:

Employees who work for certain employers or enterprises are covered by the FLSA.  These enterprises, which must have two or more employees, are: (1) those that have an annual dollar sales volume of at least $500,000; or (2) businesses providing healthcare, schools and preschools, and government agencies.  Even when there is no enterprise coverage, employees are protected by the FLSA if they are regularly engaged in interstate commerce.

Under the FLSA, employers are required to pay covered employees at least the federal minimum wage for all hours worked, as well as overtime compensation of one and one-half times the employee’s regular rate of pay for all time worked over 40 hours in a workweek.  However, the FLSA exempts certain employees from its minimum wage and overtime requirements, meaning these employees are paid a flat salary instead of time-and-a-half for hours worked over 40.  For example, employees employed in a bona fide executive, administrative, professional, or outside sales capacity may be deemed exempt from minimum wage and overtime compensation.  This is referred to as the FLSA’s “EAP” or “white collar” exemption.  To qualify for the EAP exemption, the employee must meet the following three tests:

  1. Salary Basis Test.  The employee must be paid a predetermined and fixed salary, not subject to fluctuations in the quality or quantity or work performed;
  2. Salary Level Test.  The employee’s salary must meet a minimum specified amount; and
  3. Duties Test.  The employee’s actual duties must meet the standard for executive, administrative, or professional duties, as defined by the federal regulations.

The FLSA also exempts certain highly-compensated employees from its minimum wage and overtime protections, which is referred to as the “HCE” exemption.  To meet the HCE exemption, the employee must: (a) be paid total annual compensation of $100,000 or more; (b) have the primary duty of performing office or non-manual work; and (c) customarily and regularly perform at least one of the defined exempt duties of a typical EAP employee.

Minimum Salary and Compensation Level Increases:

Of the changes the DOL has proposed, the most significant involves an increase in the minimum salary level required to meet the EAP exemption.  Currently, the regulations provide that the minimum salary necessary to qualify for the EAP exemption is $455 per week ($23,660 per year).  The DOL intends to raise this minimum level to $970 per week ($50,440 per year), which will bring the minimum salary level in line with the 40th percentile of earnings for full-time salaried workers.  However, such an increase will likely have a sizeable impact on employers.  An estimated 10.9 million employees, all of whom purportedly meet the EAP exemption under the current regulations but earn less than the newly proposed salary minimum of $970 per week, will be entitled to overtime pay under the new regulations.

Additionally, the DOL proposes to raise the minimum total compensation level required to meet the HCE exemption from $100,000 to approximately $123,000 per year, which will bring the compensation minimum in line with the 90th percentile of weekly earnings for full-time salaried workers.  Such an increase will force employers to pay overtime to any employee who will no longer earn the minimum amount required to meet the HCE exemption under the new regulations.

Automatic Annual Increases:

The DOL further intends to implement a mechanism that will automatically increase both the minimum salary level of the EAP exemption and the minimum total compensation level of the HCE exemption on an annual basis.  The DOL has proposed to do so either by maintaining the levels at a fixed percentile of weekly earnings or by updating the amounts based on changes in the consumer price index.  Either way, employers should monitor changes in the minimum compensation levels each year to ensure the employees they classify as exempt meet such levels.  The last thing an employer wants to do is consider an employee exempt and not pay the employee overtime when, in reality, the employee does not meet the exemption requirements and should be receiving overtime pay.  Such misclassifications could easily expose the employer to wage and hour claims and even a potential class action lawsuit if a similar misclassification affects numerous employees.

Establish Your Plan:

The new regulations are fully expected to take effect sometime in 2016.  If you are an employer reading this, the time to prepare and plan for the new FLSA regulations is now if you have not started already.  By taking appropriate actions before the new regulations take effect, employers can minimize any negative impacts on their business.

The first step is to conduct a thorough workforce analysis, identifying which currently exempt employees will no longer qualify for exemption when the new regulations take effect.  Employers should assess the hours worked by each identified employee, analyzing what it would cost if their current salary is converted to an hourly figure and the employee continues to work the same number of hours.  Also, employers should examine exactly what responsibilities and duties each employee’s job demands.  By gathering and understanding the above information, the employer will better be able to determine the best compensation option for each employee.

One option would be to maintain the employee’s exempt status, which would require the employer to raise the employee’s salary to meet the minimum threshold.  This may be the best option where the cost of raising the employee’s salary is slight in comparison to the amount of overtime payments that would be incurred.  However, employers taking this approach, especially those having to make larger salary adjustments, may run the risk of over-stressing their compensation budget or compressing the salaries of lower ranking employees.

The other option would be to re-classify the employee as non-exempt.  By doing so, the employer may choose to keep the employee’s compensation amount the same and pay the employee overtime when it is incurred.  This may be the best choice if the employee is expected to incur low amounts of overtime, but what if the employee is expected to work lots of overtime?  In this case, the employer may want to reduce the employee’s compensation to balance the overtime payments that will likely be incurred.  Another alternative would be to maintain the employee’s current compensation amount but either reduce, delegate, or outsource some of their responsibilities to minimize the amount of overtime worked.  All of these alternatives would involve re-classifying the employee as non-exempt because the employee will no longer meet the minimum salary or compensation level requirements.  Keep in mind, however, that re-classification may cause backlash if the employee’s pay is being reduced, if they perceived themselves to have a higher status as a result of being exempt, or if exemption offered them a greater level of flexibility in the hours they worked.  Also, re-classification will require precise time tracking to ensure non-exempt employees are being paid for any and all overtime worked.

Hidden Opportunity for Employers

Perhaps you are an employer with employees who are classified as exempt but, in reality, are on the fence as to whether or not they actually meet the exemption requirements.  You may be concerned about these so-called “close calls” because scrutiny towards exempt classifications has been on the rise.  More and more employers are being sued for misclassifying employees as exempt and failing to pay these employees overtime.  As the employer, you may have considered reclassifying “close-call” employees as non-exempt to cover yourself, but employers are generally cautious of reclassifying employees because it raises the suspicion that the employee should have never been classified as exempt to begin with.

However, with the implementation of the DOL’s new regulations, many employers will be reclassifying numerous employees for failing to meet the Salary Level Test, including employees that clearly meet the Duties Test.  In other words, reclassification will be a common occurrence following the implementation of the new regulations, and reclassification is less likely to raise suspicions in light of the new changes.  Thus, it may well be primetime for employers to reclassify employees, as necessary, once the DOL’s new rules take effect.  If you take this approach, it would be wise to directly reference the DOL’s new rules when explaining to the employee why they are being reclassified.  By informing employees that the DOL has changed the requirements for exemption, it will help reduce their suspicions.

Conclusion

The DOL will soon be changing the FLSA exemption game by drastically increasing minimum salary requirements.  Employers need to determine which previously exempt employees will no longer qualify for exemption under the new regulations and which actions the company should take as a result.  Again, the final regulations are expected to be published by July and, once published, employers will likely have only 60 days to come into compliance.  Wise employers will be prepared for the changes ahead of time and will take all necessary measures to ensure they remain compliant with all provisions of the FLSA moving forward.

***DISCLAIMER: This article should not be deemed legal advice. You should always consult with an attorney about your specific circumstances and legal rights and obligations.***

Aaron Kolquist is an associate attorney with Fryberger, Buchanan, Smith & Frederick, P.A. He is a J.D. and M.B.A. graduate from the University of North Dakota.