Have you heard? The minimum salary requirement for considering an employee “exempt” from FLSA overtime requirements is set to rise–and there are multiple ways you are likely to wind up paying more.
Here’s guest blogger and CEDR Solution Center Senior Counsel Ali Edwards’ comprehensive explanation of the proposed rule, the impact on your practice, and how you can make your opinion count while there’s time.
Proposed Changes to FLSA Exempt Overtime Criteria Pack a Big Punch
Big changes are on the horizon for employers. On July 6th, the Department of Labor (DOL) released its proposal to update and revise the exemptions to the overtime and minimum wage requirements within the Fair Labor Standards Act (FLSA). This is one of the biggest developments in wage law in a decade, and if the proposal is passed, it will impact almost every business in the United States. The proposed rule will more than double the salary threshold for exemption, to an estimated $50,440 for 2016. Small and large businesses alike will need to reassess any exempt salaried employees and make possibly costly changes to comply.
What exactly is being proposed?
The current salary level necessary to qualify as exempt from overtime under the FLSA is $455 per week, or $23,660 per year. The proposed rule would increase the salary threshold to a projected level of $970 a week, or $50,440 a year, in 2016. Thereafter, the threshold would automatically increase based on inflation or wage growth.
The DOL’s Proposed Rulemaking also discusses changes to the current duties test for qualification under the administrative, executive, and professional exemptions, to make it easier for employers to determine who is properly classified. Finally, the proposal addresses the possibility of including nondiscretionary bonuses to satisfy a portion of the standard salary requirement, which currently cannot be considered to meet the threshold.
Since 1940, the DOL’s regulations have generally required each of three tests to be met for one of the FLSA’s white collar exemptions to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount (currently $23,660/year); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations. (See CEDR’s Exempt Classifications Guide here.)
What does this mean for employers?
If the proposed rules go into effect, employers will have to reassess all positions in their office currently classified as salaried exempt, and carefully analyze any new hires as well as “inherited” workers from a previous employer. The typical medical or dental office may have exempt salaried office managers, team leaders, and professionals, such as doctors and nurse practitioners. Nurses and hygienists should almost never be treated as exempt, even under the current rules.
The main issue will be with your management teams, who will now need to meet the minimum annual salary of $50,440 to be exempt from overtime. That will leave employers with a choice of whether to increase salaries, reclassify a formerly exempt employee to non-exempt and pay overtime to these employees as needed, or hire additional workers to avoid the need for overtime – all costly alternatives.
And don’t think all your $45,000 managers will appreciate being converted to non-exempt status! They will certainly miss the flexibility that comes with being exempt, and not having to clock every minute worked. They will not enjoy being told to clock out at 5:30, and to not even check voicemail from home, in order to avoid overtime. In the future, when they take a partial day off, most will have to apply vacation or leave, or take it as unpaid. I can assure you that these managers will be annoyed.
Also, as a final word of warning, please resist the idea that they can give you a “pass” by agreeing to waive any overtime, or by agreeing to a lower salary. Employees cannot legally waive their rights under this law.
Make your voice heard while you can!
These rules are not yet final, and must go through a public comment phase before the final rules are published, likely sometime next year. You may submit written comments on the proposed rule at www.regulations.gov/ on or before September 4, 2015. All comments will be considered.
At CEDR, we are employer advocates, advising and supporting the HR needs of over 1000 businesses across the country. It’s clear that the FLSA regulations need to be updated. It’s true that middle managers in many industries are forced to work over 60 hours a week on as little as $25,000 a year, without overtime. The government has an obligation to adopt policies and minimum protections for American workers to receive fair wages, and these changes will likely have a positive impact on almost 5 million workers.
However, we must balance these concerns with those of employers and small businesses in all communities. In Tucson, Arizona, where CEDR is based, the average manager’s salary is 18% less than the national average, but the cost of living is likewise lower. These new regulations would apply to businesses regardless of size or location, and thus must take into consideration the impact of these differences in setting the salary level. Moreover, giving raises to 5 million workers does not happen in a vacuum. When companies raise salaries, the costs are passed through as price increases, making everyone’s cost of living increase.
One area where we can lessen the burden on businesses, especially dental and medical practices, is for the new regulations to allow nondiscretionary bonuses to satisfy some portion of the salary test. Currently bonuses may not be considered for the standard exemption tests, but the DOL is considering this as an option.
This is where your voice can count.
In addition, the duties tests for exemptions need to be clarified, especially the administrative exemption. With wage and hour litigation exploding over the last ten years, there’s a lot on the line for employers who try to comply but get it wrong because the DOL’s exemption criteria is unclear. A successful employee who sues their employer can recover back wages or overtime going back three years, liquidated damages of up to 100% for willful violations, plus attorneys’ fees and costs. I would say at least half of new CEDR members come in the door having misclassified at least one employee, and don’t even know it until they get a complaint, or our guidance.
If you would like a confidential analysis of the classification of positions in your office, whether you are a member or not, call CEDR Solutions. We can help. You are also free to use our Exempt Classification Guide (for CA, click here instead) to help you prepare for the changes to come.
Although the regulatory changes are still the administrative phase, there is little doubt in the HR community that some change, and quite likely the one being proposed, will be approved in some form or another. We will continue to update you as the rules change.