The most significant change made by the DOL’s Final Rule is the increase in the minimum salary level (i.e., the “salary basis test”) for white collar workers—executive, administrative, and professional—under the FLSA from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). As of December 1, 2016, an individual earning below that threshold will not meet the salary basis test of the white collar exemptions and will therefore lose his or her exempt status—becoming entitled to overtime pay. Importantly, employers will for the first time be able to use additional compensation that affected employees receive, such as bonuses and commissions, to satisfy up to ten percent of the minimum salary level, so long as the payments are paid on at least a quarterly basis. In addition to increasing the salary basis test for white collar workers, DOL also raised the minimum salary threshold for highly compensated employees, from $100,000 per year to $134,004 per year. The DOL also modified the FLSA regulations to account for automatic increases every three years, the first occurring on January 1, 2020.
While the DOL’s Final Rule does not become effective until December 1, 2016, employers should not hesitate to begin analyzing how it will impact employee classifications. HR professionals should engage central management to form a plan to achieve compliance. Early conversations among CEOs, CFOs, and HR managers will be critical, and a transition team with appropriate decision-making authority should be appointed to lead this process. Early conversations will beget several pragmatic questions, such as whether the employer will reduce hours to avoid overtime, whether hiring new workers will be necessary to make up for potential overtime, how to address employee morale, and how to educate employees affected by any changes the employer implements.
To begin addressing these issues, the first step an employer should take is to engage internal or external counsel to undertake a wage and hour audit to review wage and hour practices in preparation for systemic, employer-wide changes that comply with the new rules. Specifically, employers should determine how many employees make less than the minimum salary amount, how many employees are close to the minimum salary amount, whether employees near the $47,476 threshold should be afforded salary increases to maintain the exemption or whether they should be converted to non-exempt status. From a strategic perspective, wage and hour audits may disclose other misclassification issues, and employers should correct any misclassification at the same time all other changes under the Final Rule will be made.
From a budget perspective, the employer may consider reducing the non-exempt employee’s pay rate so that, with overtime compensation, the total compensation will be equivalent to the employee’s former salary. For instance, if an exempt employee normally works 50 hours per week and earns a weekly salary of $800 ($41,600 per year and $16.00 per hour), converting that employee to non-exempt without changing the compensation rate would result in the employee receiving a weekly amount of $880 ($45,760 per year) after being paid overtime for the ten overtime hours worked each week. However, if the employer reduces the employee’s hourly rate to $14.55 per hour, the employee’s total weekly compensation with overtime would be $800.25 ($41,613 per year). From a budget perspective, CEOs and CFOs may prefer this option. Employee morale, however, may suffer.
To ease employee morale issues, the employer should consider whether to pay non-exempt employees on an hourly basis, or to continue to pay employees on a salary basis plus overtime. Even after the new rule becomes effective, employers can continue to pay non-exempt employees a set salary, but that salary must be supplemented with overtime pay (or compensatory time for public employers) if the employee works over forty hours in a workweek. This method of compensation may reduce the impact on employee morale, but will increase administrative burdens for HR and payroll departments. If the employer chooses to pay non-exempt workers a salary plus overtime, the salary acts as a minimum compensation amount for normally scheduled hours, with hours worked over forty being paid at a half-time rate, and hours paid over the normal schedule are paid at a rate of one and a half times the regular rate of pay. Employers may also pay workers whose work hours fluctuate by using the fluctuating workweek method, where hours worked over forty are paid at a half-time rate. Again, there are administrative burdens to undertake this process, and employers must nevertheless keep accurate time records of all hours worked for their non-exempt employees.
Once the transition team identifies the regulatory changes affecting the employer, and how the employer will move forward with its proposed changes, HR should develop a plan for implementation. The plan should include a process to communicate policies for tracking hours worked and reducing off-the-clock exposure. For instance, employers may need to remove access to work emails on personal telephones and tablets, remove remote login access to work computer systems, and prohibit non-exempt employees from working through lunches or taking meal breaks at their desks. Similarly, employees who have long-been exempt should be given specific training on how to use the employer’s timekeeping platform. Managers and supervisors, too, should receive wage and hour training so that employees are not permitted to work off-the-clock.
Breaking the news
Well before the deadline to comply with the Final Rule—December 1, 2016—employers should begin conversations with affected employees. Beginning the dialogue now will reduce the element of surprise and provide an explanation to the employee of why the changes are necessary. These interactions will help soften the impact of the reclassification decision and help affected employees understand that the compensation change is not a reflection on their performance and do not constitute a demotion. In this respect, one message that should also be communicated to affected employees is that they will now be compensated for overtime. Most employers have policies that require overtime approval in advance, so any employee training should include an overview of any restrictions on overtime. On the same token, managers and supervisors should be advised that even if overtime is not approved, if it is worked it must be paid, and the employee should be counseled as to the company policy instead of being denied compensation for such overtime hours worked.
Additionally, employers should document their interactions with affected employees. Despite having a clear message, some employees may nevertheless feel like they were targeted because of some protected characteristic or in retaliation for engaging in protected activity. Maintaining meeting records, and what was discussed with each employee, will help the employer defend against potential charges of discrimination, unfair labor practices charges or subsequent litigation. Also, be sure to inform supervisors and managers that the employers cannot require employees to keep information about pay confidential.
The DOL’s revised overtime regulations will impact employers differently, but the fiscal, psychological, and practical issues attendant with compliance under the DOL’s Final Rule cannot be overstated. Some industries, and particularly small businesses, will be disproportionately affected. Employers will need to carefully consider the impact of these regulatory changes on the financial bottom-line. Against all this, employers must balance employee morale and turnover. There is a degree of prestige that affected employees will lose as a result of reclassification, and short of potentially doubling their salaries, there is only so much an employer can do to mitigate the impact on morale. As employers across the country brace for the impact of the DOL’s new rule, strategic planning with high-level management and employment law counsel will be critical to chart an appropriate course.
Missy McJunkins Duke is a Director with Cross, Gunter, Witherspoon & Galchus, P.C. in Little Rock.