As Expected, Labor Lifts Limits for Minimum Wage/Overtime Exemptions

[Blogmeister's Note: To re-state an obvious but important point that our blogger, Kevin, has previously made, neither he nor we are "employment" lawyers. But readers and others have expressed enough interest in the coming changes to the federal minimum wage and overtime rules that he thought it a good idea to take a look at what's in store. The following overview is intended to provide useful background information; it should not be taken as a comprehensive explanation or exhaustive history of the subject, and certainly not "legal advice". If you have questions about the coming changes, be sure to contact an employment lawyer.]

Last month, in anticipation of a proposed-but-not-yet-formally-adopted set of changes likely to have far-reaching effects on U.S. businesses, I reviewed the general area of minimum wage and overtime rules adopted pursuant to the Fair Labor Standards Act (FLSA). And sure enough, a month and a half after my post, the announcement was made: in a 162-page item published in the Federal Register (the day after considerable related publicity), the Wage and Hour Division of the Department of Labor (DoL) laid it all out. So with last month's post as background, we can now take a look at what actual changes are looming (and when I say looming, I mean it: the new rules are set to take effect as of December 1, 2016).

If you haven't read my post from last month, I recommend that you go do that now. It will provide important information that will make understanding the changes, and their potential effect on you, considerably easier.

As I explained, federal minimum wage and overtime rules apply to some, but not all, businesses and some, but not, all employees. As I mentioned in my earlier post (and address briefly below), not all employers are subject to the FLSA. But that doesn't change. The changes emanating from these rules all relate to an employee's exempt/non-exempt status (and his or her eligibility to make the minimum wage and earn overtime pay for hours worked beyond 40 hours in a week).

Recall that the requirements are intended to benefit many hourly and salaried workers, but not other, primarily "white collar", workers who are deemed "exempt". The purpose behind the exempt/nonexempt distinction is simple: white collar workers, with their higher salaries and benefits (not to mention better opportunities for advancement) don't need the protection of the FLSA, while their blue collar compatriots do.

The distinction between the exempt and the nonexempt employees is based on three separate sets of considerations, i.e., the worker's duties, salary basis and salary level. Under the test, an employee is "exempt" from minimum wage/overtime if he/she is:

• primarily performing executive, administrative, or professional duties as provided in the DoL's regulations. This is the duties component.
• salaried in some way, meaning that he/she is paid a predetermined and fixed salary which is not hourly in nature and which is not subject to reduction because of variations in the quality or quantity of work performed. This is the salary basis component; and
• paid more than a governmentally-specified weekly or annual threshold amount, currently $455 per week or $23,660 annually. This is the salary level component.

You can think of it this way: In general, an employee is "nonexempt" and, therefore, eligible for minimum wage and overtime protections, if he/she is paid:

• on an hourly basis;
• on a weekly or less frequent basis but earns less than the weekly or annual threshold set by the DoL; or
• weekly or less frequently and is above the threshold, but fails to meet any of the duties tests.

The new rules alter only the "salary level" test, but in three separate respects. First, the DoL is increasing the weekly and annual threshold amounts that distinguish the exempt from the nonexempt. And it's a major increase: the weekly level will shoot from $455 to $913, and the annual level will also double, from $23,660 to $47,476. Since the current rates have been in effect since 2004, the DoL is clearly making up for lost time.

Second, looking ahead, DoL plans to readjust the rates automatically every three years according to a formula set in the new rules.

And third, DoL has modified the treatment of certain bonuses, incentive payments and commissions as those may affect employees' compensation for purposes of determining exempt/nonexempt status.

New Minimum Threshold
The DoL's decision to increase the threshold numbers is understandable. The current levels were set in 2004 and had, in DoL's view, fallen completely out of touch with the realities of the modern workplace. In fact, the minimum had been updated only once since the 1970s and, in the agency's view, the 2004 increase (which had tripled the previous minimum) set the bar too low, a deficiency that has only gotten worse over the past 12 years.

The threshold figures adopted by DoL are slightly lower than those that had been proposed in its July 2015 Notice of Proposed Rulemaking. The original proposal would have pegged the minimum thresholds at $970 weekly and $50,440 annually. As noted above, the thresholds that were finally adopted are $913 weekly/$47,476 annually. DoL chose these numbers because they are equal to the 40th percentile of weekly earnings for full-time salaried workers in lowest wage Census region.

The increase in threshold figures will have a significant effect: DoL estimates that, as a result of the change: (a) 4.1 million workers nationwide will move from exempt to nonexempt status and, thus, become eligible for overtime; and (b) about 100,000 will receive a salary increase. Overall, it should result in 35% of all full-time salaried workers staying below the threshold for the salary level test and, thus, being eligible for overtime pay, even if they meet the other two tests.

The new rules also affect certain employees considered "highly compensated employees" (HCEs), a category of employees exempt from the overtime rules if their annual salary is at least $100,000. Only a minimal duties test is applied once that salary threshold is met. (The employee needs only to customarily and regularly perform one of the duties of executive, administrative or professional, as opposed to having those duties be a primary part of the employee's job). The DoL increased the minimum threshold for HCE status from $100,000 per year to $134,004 per year, equal to the 90th percentile of all salaries. The employee must make at least $913 per week.

(DoL also made salary threshold adjustments in a couple of "special categories" - but unless you have employees in either (a) American Samoa or (b) the motion picture industry, you don't need to worry about them.)

Automatic readjustments every three years
As I noted above, the new minimum thresholds of $913 per week/$47,476 per year equate to the 40th percentile of salaried workers around the country (with the HCE threshold equating to the 90th percentile).

While these are the first increases in 12 years, we won't be waiting that long for the next changes. The thresholds will be automatically readjusted every three years to correspond to the 40th and 90th percentile salary levels in the lowest range Census region at the time of each adjustment. (The current adjustment is based on salaries in the South; that could change for future adjustments.) Changes will be announced 150 days in advance. Mark your calendar: the next announcement is set for August 1, 2019, ahead of a January 1, 2020 change in the threshold amounts. The triennial approach differs slightly from DoL's original proposal, which would have adjusted the thresholds every year.

A NEW policy regarding treatment of nondiscretionary bonuses, incentive payments and commissions
While the threshold adjustments appear designed to increase the universe of nonexempt employees eligible for federal minimum wage/overtime protection, DoL has also added a new consideration that could undercut that some while still allowing employers to classify some employees as exempt. Now, for the first time, employers will be able to count some compensation (e.g., some bonuses, incentive payments, commissions) beyond straight salary against the threshold. Specifically, an employer can include these amounts as up to 10% of the threshold amount. In other words, an employee earning at least $42,728.40 in annual salary could be categorized as an exempt employee if he or she also makes more than $4,747.60 in nondiscretionary bonuses, incentive payments, and commissions.

Not all non-salary compensation can be counted in this fashion. "Discretionary" bonuses, i.e., amounts unilaterally determined by the employer in its sole discretion, don't count. But portions of payments for meeting a pre-established goal (e.g., production goals), fixed formula commissions or retention bonuses can be factored into the calculation of an employee's threshold salary for purposes of minimum wage/overtime eligibility. Additionally, nondiscretionary bonuses and incentive payments can be credited toward a portion of the standard salary level test only if the payment is made on a quarterly or more frequent basis. The employer can make a "catch-up" payment if employee does not reach minimum with the bonus, but this catch-up payment must be paid within the next quarter or the employer will have to pay overtime retroactively.

DOL Suggestions for Adjusting to the new Rules
Recognizing the widespread impact of these changes, the DoL has issued guidance for businesses to smooth this transition. Whether DoL's suggestions can be easily implemented in any particular business is far from clear. Nevertheless, for whatever they're worth we pass them along to you as we got them from DoL:

• Provide pay raises to get as many employees as possible above the new threshold if paying overtime or hiring new employees is not an option;
• Spread work around. Employers may hire others to fill in the time not being worked by "capped" employees;
• Calculate how best to pay overtime. Employers enjoy a great deal of flexibility when it comes to tracking hours for purposes of the 40 hour cut-off and overtime pay for nonexempt employees. Hours and payments can still be tracked in a wide variety of ways - there is no requirement that employees "punch a time clock"; rather, they are required simply to record their hours each day. Employers and employees can, in certain situations, agree to a flat overtime fee. However, be forewarned that there must be a clear understanding between employer and employee as to this amount, meaning that such an arrangement probably works only where the employee works a consistent amount of overtime (since variations in overtime hours would require adjustment of the overtime payment). Further, from an employer point of view, this relaxed arrangement will work well only until it doesn't, i.e., until the employee files a complaint under the FLSA.

What now?
The clock is ticking. You have until December 1 to determine whether, and how, your situation will be affected by these changes and, more importantly, to make any necessary adjustments. This is not a trivial process: it could affect a significant number of your employees.

How do you do this? Where to start?

A natural starting point would be to review how many employees might be affected. Remember, this could be "NONE". The FLSA doesn't apply to all employees or to all companies. So getting a fix on where you stand vis-i-vis the FLSA should probably be Step One.

(With respect to company exemptions, I identified the general applicability of the FLSA in my prior post. Our usual media-oriented readers should be aware of a couple of narrow exemptions that may be applicable: a "small newspaper" exemption and an exemption for certain employees of non-metropolitan broadcast stations. Each of these is subject to very specific limits; if you think you might not be subject to the FLSA, be sure to check with an employment attorney for details.)

If you conclude that you're subject to the FLSA without exemption, your next order of business is probably to identify how many employees fall between the old ($455 per week or $23,660 per year) and new ($913 or $47,476 per year) thresholds. Those are the folks who will be converted from exempt to nonexempt if their salaries don't change. This will let you know exactly what you're dealing with in terms of your financial situation and needs, as well as their personalities.

You may even want to begin tracking these employees' hours in the lead-up to December 1 to help you determine whether those regularly working beyond 40 hours per week should simply receive a salary increase to boost them over the exempt/nonexempt threshold and thus eliminate the need to provide minimum wages and overtime to them. (Bear in mind, too, that before making any changes, you should be aware of and sensitive to other relevant laws, like discrimination laws and the employee/contractor distinction.)

You may also want to start thinking about how to treat "off duty" tasks like taking work home, making calls and sending emails at home, and working through lunch and before/after shifts. Such things can constitute overtime work. You may need to update your employee handbooks to specifically include limits on after-hours communication. Such clarifications may be important to get the message more to supervisors than to the employees themselves, since supervisors may need to refrain from communicating with workers after hours or even shut down excessive work by employees they supervise.

But the most important step - given that these are just basic suggestions - is that you contact an employment law attorney as soon as possible with any questions. December 1 will be here before you know it.