Despite Election, Employers Should Still Comply by December 1, 2016 with New Minimum Salary Thresholds for FLSA Overtime Exemptions
To the surprise of many, Donald Trump has been elected president and will be inaugurated on January 20, 2017. In his “100-day action plan” to “Make America Great Again,” Trump pledged on his first day in office to “cancel every unconstitutional executive action, memorandum and order issued by President Obama.” Meanwhile, President Obama had issued a “Presidential Memorandum” on March 13, 2014 directing the Department of Labor (DOL) to update the regulations defining the protections for “white collar” workers under the Fair Labor Standards Act (FLSA) which regulates minimum wage and overtime. As a result, the DOL issued new regulations that doubled the minimum salary threshold for employees to be exempt from the FLSA. These changes take effect December 1, 2016. Trump will not be able to cancel these regulations before then, and it is still unclear whether a federal judge might temporarily block the new regulations. Therefore, companies should continue to move forward to comply with the new regulations before December 1, 2016.
New Minimum Salary Threshold for Exemption
In response to President Obama’s “Presidential Memorandum,” the DOL published for comment on July 6, 2015 a proposed rule to update the FLSA’s “white collar” exemptions. The rule as proposed did not change the basic “duties test” for the exemptions, but it did more than double the salary basis to qualify for those exemptions. After the comment period, the DOL issued a final rule on May 18, 2016. It raised the minimum salary basis for “white collar” exemptions from $23,660 annually ($455 per week) to $47,476 annually ($913 per week); raised the minimum salary for the “highly compensated employee” exemption from $100,000 to $134,004; and included an automatic increase to these thresholds every three years.
When the DOL released its proposed rule, it projected the changes would impact 4.2 million workers who would receive either a higher salary to remain exempt, or be reclassified as nonexempt and receive overtime protections. Either way, it will likely cost businesses more money.
Employers should not expect to be saved from the new regulations. Donald Trump will not take office until January 20, 2017. Even then, he cannot simply rescind the regulations. Either the DOL will have to change the regulations again through the same lengthy administrative process, or Congress will have to pass a law effectively overruling the regulations.
Meanwhile, multiple states and business groups have filed lawsuits in a federal court in the Eastern District of Texas seeking to block the DOL regulations. At a hearing on November 16, the judge said he may decide as soon as November 22 whether to enter a temporary injunction barring the new overtime rules from taking effect while he considers the larger issues raised in the lawsuits.
Since it is still unclear what the judge will do, companies should continue to prepare for the new regulations by taking the following actions to ensure their exempt employees are still really exempt:
1. Revisit the duties tests
First, a company should revisit the applicable “duties tests” for the “white collar” exemptions to confirm its employees are properly classified as exempt or nonexempt. Since the new regulations did not change these duties, this exercise will be useful regardless whether the new regulations take effect. The DOL will likely continue to enforce the duties strictly and lawyers have increasingly filed collective actions claiming employees are misclassified under the FLSA. As a result, companies should make sure their exempt employees are really performing exempt duties under the FLSA (and applicable state law).
2. Revisit the salary or wages
Second, the company should review whether its exempt employees are paid enough to remain exempt. The new regulations do contain one concession for employers. For the first time, employers may consider bonuses and incentive payments to count for up to 10 percent of the new salary. An employee who performs exempt duties and who is paid at least $47,476 annually ($913 per week) will still be exempt from the FLSA.
But if the employee makes less than $47,476 annually, the employee will be considered nonexempt under the new regulations. Although the employer can just raise the salary, some jobs previously classified as exempt simply will not justify the raise. For those reclassified as nonexempt, the employer will need to track the time worked and pay overtime when the employee works more than 40 hours in a week. Again, the employer should also review applicable state law.
3. Implement controls
Third, the company should make sure it can control overtime. A business needs its costs and expenses–including wages–to be reasonable and predictable. To this end, a company should have policies and procedures to keep overtime under control. Although overtime worked must be paid, the employer may still require overtime to be authorized in advance and impose discipline on employees who work unauthorized overtime.
The company should also review how it calculates overtime. The employer could simply convert an employee’s prior salary to an equivalent hourly rate. However, since the overtime rate is generally paid at “time and a half” (or 1.5 times the regular hourly rate), overtime could increase the cost. As a result, an employer may implement a lower hourly rate in anticipation of the additional overtime cost. But if less overtime is worked than anticipated, an employee could actually make less money than before.
An employer may instead consider alternative methods for regular and overtime pay. For instance, employers can still pay nonexempt employees a salary, as long as overtime is also paid when worked. And, in some situations the overtime may be computed at only “half time” rather than “time and a half.” But each method has its own complications and trade offs. The employer should carefully review the available methods to determine which is appropriate under the circumstances.
Throughout, the company should remember employee morale. Previously exempt employees may not like the new restrictions (like clocking in and out) that come with being reclassified as nonexempt. Some employees may also end up making less money than before, or may lose employee benefits. In other words, companies should consider not only the cost to the business, but also the cost to the employees.
Although the DOL’s changes to the FLSA regulations may not be consistent with the new president’s vision, the reality is they will go into effect on December 1, 2016 (unless temporarily blocked by a federal judge) and may remain for some time. Employers should continue to monitor the situation, and continue to prepare by: reviewing jobs currently classified as exempt, reclassifying those jobs where necessary, and implementing overtime controls where appropriate. And the employer should never lose sight of employee morale. If not handled carefully, the company may lose one of its most valuable assets—its employees—with the attendant cost for turnover. Companies should reevaluate now whether their exempt employees will still be exempt after December 1, 2016.
Douglas Bracken is Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization. He is a partner at Scheef & Stone, a full-service commercial law firm in Texas that represents businesses of all sizes throughout the United States and, through its Mackrell International network, around the world. Learn more about Doug here.