By: Kendra Clements – The Mettise Group consultant. Email: kendra@mettise.com
Across the country employers are scrambling to meet the Department of Labor’s (DOL’s) December 1, 2016 deadline. The new rules, published back in May of 2016, include changes that substantially increase the minimum salary requirement for certain exemptions under the Fair Labor Standards Act (FLSA). The FLSA requires covered employers to pay “nonexempt” employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. While most employees are non-exempt, the FLSA includes exemptions for certain administrative, professional, executive, highly compensated, outside sales, and computer professional employees.
Currently, to be considered “exempt,” these employees must generally satisfy three tests:
1. Salary-level test: Employers must pay employees at least the current minimum salary per week.
2. Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
3. Duties test: The employee’s primary duties must meet certain criteria.
Highlights of the Final Rule
Rather than weed through 508 pages of comprehensive rules (compliments of the Wage and Hour Division) let’s cut-to-the-chase and focus on 7 Key Facts:
Key Fact #1: The new rules go into effect December 1, 2016.
Key Fact #2: The final rule focuses primarily on updating the salary and compensation levels needed for executive, administrative, and professional employees to be exempt.
Key Fact #3: Salary Thresholds Increased. Under the new rule the salary threshold for the executive, administrative, and professional employee exemptions was set at the 40th percentile of earnings of full- time salaried workers in the lowest wage Census Region (currently the South). This is $913 per week / $47,476 per year – up significantly from $455 per week / $23,600 per year. The salary threshold for highly compensated employees was also increased. The new rule raised the salary threshold for highly compensated employees to the 90th percentile of full-time salaried workers nationally, or $134,004, up from $100,000 per year.
Key Fact #4: Automatic Updates to Salary Requirements. The new rule established automatic increases to the two salary thresholds every 3 years beginning January 1, 2020. The DOL wants to make adjustments that would keep the salary requirements fixed at the 40th and 90th percentiles. The Department will publish all updated rates in the Federal Register at least 150 days before their effective date, and will also post them on the Wage and Hour Division’s website. Stay tuned.
Key Fact #5: No Changes to Duties Tests. The DOL did not make any changes to the duties test (mentioned previously), for the administrative, executive, professional, or highly compensated employee exemptions.
Key Fact #6: Non-discretionary Compensation Can Help Satisfy the Standard Salary Level. For the first time, employers may use non-discretionary bonuses (generally defined as those announced or promised in advance), incentive payments, and commissions, to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. To satisfy the rule, employers may make one final catch-up payment no later than the next pay period after at the end of the quarter if the bonus, incentive payment, or commission ended up being less than anticipated and the employee’s weekly salary plus non-discretionary bonuses, incentives and commissions does not equal or exceed 13 times the minimum weekly salary of $913.
Key Fact #7: New Rule Could Have Substantial Impacts. The DOL estimates that in the first year as many as 4.2 million workers would either need to: (1) be reclassified as non-exempt and paid overtime whenever they work more than 40 hours in a workweek; or (2) receive an increase in their salary to meet the new requirement.
Being aware of the new rules is one thing, but applying them is another. In order to implement the DOL’s new rules, there are several critical areas that must be considered.
Policy and Procedure: Review and update accordingly, all employee handbooks, on-boarding material, or other internal policy and procedures with new earnings rules. For example, update all references to current exemption earnings $455 per week / $23, 600 with new exemption earnings rule of $913 per week / $47,476 per year.
Job Descriptions: Evaluate position descriptions focusing on “primary duties.” Keep in mind that job titles do not determine exemption status. Therefore, not all supervisors or managers will classify as “Exempt.” Exemption status is determined by meeting specific criteria according to Salary-level, Salary- basis, and Duties Test as mentioned above. The DOL’s new rules, with regard to “primary duty” might eliminate (or substantially reduce) a manager’s ability to engage in “line work” and management concurrently. That could mean the loss of the exemption for some front-line managers, particularly in smaller establishments.
Pay Practices and Systems: Analyze current timekeeping practices, employee benefits, and systems to ensure they align with the new rules. For example, if an employer has different levels of benefits for exempt and nonexempt workers, those processes and plans should be evaluated. Additionally, employers should review bonuses for reclassified workers, current paid time off, or vacation / sick time accrual, and possibly long-term disability or life insurance plans.
Communication Plan: These changes might be difficult for some employees to accept. In order to keep a healthy morale, identify and stick-to one communication strategy for all affected employees. Communication should be consistent and transparent. This is an opportunity to educate affected employees about the DOL’s new rules. Most importantly, reduce the element of surprise, and begin the dialogue now. Share with your employees why the changes are happening so they understand it’s no reflection on their performance. One way to soften the blow is to point out that previously exempt workers will now be paid for after-hours work.
Company Property: Be sure to evaluate policy and procedure surrounding company property. Pay close attention to employees who have been reclassified. Identify workers who take home company phones and laptops. This group of reclassified employees may have to be told to leave these items at work. Realizing this measure may fuel employee upset, another option is drafting a policy where managers can instruct employees on what types of work are authorized outside of normal working hours; how much time is authorized; and the necessity of recording all time worked, as that recorded time will need to be paid.
The DOL’s new rules are fast approaching. There are a lot of I’s to dot and t’s to cross in order to meet the new regulations. The best advice for employers is to explore and exhaust all internal and external resources and support while on the path to compliance. Many heads are better than one. Don’t go it alone.
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