Note: This post was updated in June 2016 to stay current with changes in the regulatory climate.
Businesses across the United States are facing a series of compliance hurdles due to looming regulatory changes from the U.S. Department of Labor (“USDOL”). For employers, the new regulations present considerable compliance risks concerning overtime pay requirements for employees covered under the federal Fair Labor Standards Act (“FLSA”). Is your business prepared?
Common exemptions from FLSA coverage are the so-called “white collar” job classifications for (1) executives; (2) “administrative employees”, i.e., those whose duties primarily include office work that is directly related to the employer’s business operations and requires the regular exercise of independent judgment and discretion; (3) professionals; (4) computer professionals; and (5) and outside sales employees. However, whether a particular job classification is truly exempt depends on more than an employee’s duties or an employer’s title for a particular job position; the inquiry begins with an employee’s annual salary. FLSA exemptions are highly regulated and litigated—and, aside from being dense, these regulations can also be dynamic.
Update—President Obama announced USDOL’s publication of its Final Rule redefining FLSA’s overtime pay exemptions on May 18, 2016. Many employers are scrambling to adjust their employee compensation plans before the Final Rule goes into effect because the new regulations will boost the minimum annual salary needed to trigger FLSA’s white-collar exemption from overtime pay. On December 1, 2016, the current threshold will increase from $23,660 to $47,476. After December 1, employees earning less than $47,476 must be paid overtime because they will cease to be “exempt” from FLSA’s overtime pay provisions, regardless of whether they are performing traditionally “exempt” duties. By USDOL’s own state-by-state breakdown, some 4.2 million will be eligible for overtime pay this December.
It is therefore unsurprising that, when the new regulations were first proposed last year, USDOL received more than 250,000 comments. Many commentators pushed for a delay in the effective date of the regulations, citing the need for time to make operational adjustments, including reevaluating employees’ job classifications, duties, work schedules, and compensation plans. Commentators also responded to USDOL’s request for comments on possible changes to the “duties test.” This request—given that USDOL’s proposal did not itself suggest any changes to the duties test—was rather surprising.
Update—USDOL’s request for comments on the duties test spurred spirited discussions between employers and employment law practitioners up until the Final Rule was published. The duties test requires that, in addition to meeting the salary threshold, the “primary” job duties of exempt employees fall within one of the white-collar job classifications. For now, this is unlikely to change. Nevertheless, USDOL did request comments on changes to the duties test and it never hurts to think ahead.
One future possibility is that USDOL could adopt a version of the duties test similar to the test used in California. At a high level, the key distinction between USDOL’s current test and the California test is best described as quality versus quantity. Under California’s strict quantitative standard, exempt employees must be “primarily engaged in” exempt job duties by spending more than 50% of their time performing them. In contrast, the general rule under USDOL’s more qualitative test is that exempt employees must perform exempt duties at least 50% of the time. Moreover, in certain circumstances, employees spending less than 50% of their time on exempt work can still satisfy the primary duty requirement under the rule.
Update—Even without changes to the duties test, the breadth of the increase to the overtime salary threshold by itself nevertheless has employers thinking seriously about employee reclassification. Proper classification is critical because, as some employers know all too well, misclassifying employees as exempt under FLSA can be a costly mistake. For example, in 2012, behemoth retailer Wal-Mart paid out $4.8 million in back wages to more than 4,500 managers who were misclassified as exempt from FLSA overtime requirements. In 2014, home improvement retailer Lowe’s paid $9.5 million to settle a class action filed by its HR managers alleging they were misclassified. And last September, USDOL auditors found that Halliburton, the oil field solutions giant, had misclassified some 28 job positions as exempt and required the company to pay out $18.2 million in overtime owed to more than 1,000 employees.
For smaller businesses, dates with USDOL auditors or protracted litigation with employees can have serious, if not calamitous, effects on finances and operations. Now is the time to take that critical step to reassessing your employee compensation plans. Below are a few tips to keep in mind that can help lessen compliance risks while keeping costs to a minimum:
- Review Employee Classifications. Employers should understand their employees’ compensation structures and job classifications—as well as the differences between exempt and nonexempt status under the FLSA. Remember that under the Final Rule, employees earning less than $47,476 are most likely nonexempt and thus eligible for overtime pay. Try and forecast the impact of anticipated reclassifications on future operating costs, evaluate the job duties of all employees, and plan accordingly.
- Check Employees’ Hours. Employers can reduce the impact of the Final Rule by closely monitoring and, where appropriate, explicitly limiting the number of hours employees work each week. Consider any of the various tools that exist to help employers make informed staffing choices. Some of these tools provide automated time and attendance systems that perpetually track hours worked. Such systems can automatically alert you whenever an employee is closing in on working 40 hours in a given workweek. An early alert might give you the extra time you need to make informed scheduling changes before the work week ends.
- Consider Hourly Pay. For employees who often work less than 40 hours per week, consider converting them to nonexempt, hourly status. This can give you the scheduling flexibility you need. However, you still need to proactively monitor hourly employees’ work schedules to ensure compliance with overtime rules. Additionally, consider how this change might affect deductions, time off, and other aspects of employment and compensation. Remember to communicate any changes to employees in advance and consider how employees may perceive these changes.
- Decrease Costs by Paying More. Particularly for small businesses, raising the salaries of employees who regularly work more than 40 hours per week above the $47,476 overtime threshold can decrease costs in the long run. However, this strategy should be carefully thought out. Of course, you will need to review the relevant regulations and audit current job responsibilities to ensure that the employees will actually qualify for the exemption. Also, be sure to consider how a given employee’s increased salary would compare to the overtime costs that you estimate would otherwise apply once the Final Rule goes into effect.
All that said, you may have heard that federal legislators have introduced a bill that, if passed, would push the effective date of the Final Rule into 2017. Don’t count on it. “The Workplace Advancement and Opportunity Act” (H.R. 4773 and S. 2707) (“the Act”) reflects legislators’ concerns that USDOL failed to account for a variety of negative factors, including the harsh effects on small businesses, non-profits, and lower-wage industries; as well as regional cost-of-living and salary differences, the curtailing of workplace flexibility, and the compliance costs now facing employers. Whatever Congress might think about USDOL’s rulemaking abilities, employers are nevertheless well advised to continue proactively addressing compliance issues. Even if the Act passes in both the House and the Senate, it will likely face a presidential veto, which can only be overridden by a two-thirds majority vote in both chambers of Congress.
Update—The Final Rule’s effective date is December 1, 2016. The sooner you take the time to review employee classifications, staffing systems, and compensation plans, the better. Navigating these regulations will take time. But being proactive now rather than reactive later is, in most cases, better for business.
Take care,
– Jim
For further information on this topic, please contact Max Julian at [email protected] or by phone at (216) 573-6000
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A, and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
