The federal government once again has proposed changes to the minimum compensation employers may pay certain “white collar” employees for them to be exempt from federal law’s overtime requirements. This Client Alert describes the proposed changes and the implications to companies. We will also be hosting a presentation, on March 19 at 12:00 p.m. at our office, to provide further analysis for which you can RSVP here.
Introduction and Summary
Last week, the U.S. Department of Labor announced proposed changes to federal overtime pay regulations that would increase the number of employees who must be paid overtime. The proposed regulations have several key terms impacting federal overtime law. First, the weekly salary minimum required to qualify for the so-called “white collar” exemptions under the federal Fair Labor Standards Act (“FLSA”) would increase from $455/week ($23,660 annualized) to $679/week ($35,308 annualized). Second, the proposed regulation would increase the annual compensation requirement to qualify under the FLSA’s highly compensated employee exemption from $100,000 to $147,414, of which $35,308 must be paid in weekly salary. Third, unlike the changes proposed by the Obama Administration which were enjoined at the 11th hour by a federal court judge, the present proposal does not automatically update the salary and compensation levels annually. These regulations will require employers to re-evaluate their pay practices for employees, including managers, previously treated as exempt from overtime but who earned less than $679 per week.
The FLSA is the federal law that governs federal overtime and minimum wage requirements. While there is a presumption that employees are entitled to overtime pay for all hours worked over 40 in a week, the FLSA provides exemptions from this requirement if certain conditions are met. Currently, under the executive, administrative, and professional exemptions, employees are exempt from federal overtime requirements if they: (1) are salaried, meaning they are paid a predetermined and fixed salary not subject to reduction because of variations in the quantity or quality of their work; (2) are paid more than the salary threshold of $455/week ($23,660/year); and (3) primarily perform executive, administrative, or professional duties as provided in DOL regulations and courts’ interpretations of those regulations. The FLSA also provides a highly compensated employee exemption, which exempts from the law’s overtime requirement employees who have an annual salary of $100,000 or greater (including a minimum of $455/week), whose primary duty includes performing office or non-manual work, and who customarily and regularly perform at least one of the exempt duties of a “white collar” exempt employee.” The salary minimum was last adjusted in 2004 and since then there have been no changes to account for inflation or other market conditions. On March 7, the DOL disclosed its proposed regulations.
The Proposed New Overtime Regulations
1. The proposed regulations’ most significant change is increasing the salary minimum for the “white collar” exemptions from $455/week to $679/week, which the DOL estimates will have an immediate impact on 1.1 million workers who would need to be reclassified as overtime eligible and paid based on their hours worked or have their salary increased to the new minimum.
2. The “highly compensated employee” exemption compensation minimum increases from $100,000 to $147,414, of which at least $35,308 must be met through salary, rather than non-discretionary bonuses or a catch-up payment.
3. Employers can satisfy up to 10% of the new salary level through nondiscretionary bonuses, including commissions. Under the proposed rule, the 10% of compensation may be paid annually.
4. Employers are permitted a catch-up payment at the end of the year if the nondiscretionary pay is insufficient to bring the employee up to the annualized salary minimum.
5. The proposed regulations do not contemplate changes to the duties test or automatic annual increases to salary minimums, although the DOL intends to examine the salary minimums every four year and subject any future increases to the notice-and-comment process.
Implications for Employers
The proposed regulations will not take effect until after the public comment period, which will be 60 days after the proposed regulations are published in the Federal Register. Until the regulations are enacted, these proposals do not create immediate obligations for employers. Nonetheless, especially to the extent they did not in response to the proposed changes during the Obama Administration, employers should use this period to evaluate their pay practices for employees who would be affected by the new regulations. Some issues to consider are:
• Employers will need to prepare to convert these employees to overtime eligible, non-exempt status. In order to minimize the additional expense related to this conversion and to keep the total compensation approximate to the current salary, employers will want to evaluate the number of hours these employees work, the consistency of those hours, and how those hours can be accurately tracked and recorded. As budgets are prepared, employers will want to take into account increased labor costs caused by the regulation.
• Employers dealing with a workforce not accustomed to tracking employee hours will have to implement processes and practices that track hours in order to accurately compensate newly-hourly employees. Employers will also have to prepare the affected employees for the conversion to non-exempt status. Many exempt employees take pride in being salaried and professional, and these employees may resent and resist keeping track of hours worked. The responsibility to pay employees for all hours worked rests with the employer, even where the employee does not want to report all hours worked, and employee resistance to proper recording practices can result in overtime liability.
• For employees whose salaried compensation is close to the revised federal minimum to qualify for the exemption, employers may want to consider whether an increase in compensation to meet the new minimum is a better course than re-classifying the employee as non-exempt.
• Employers should evaluate the duties actually performed by their employees to determine whether they may qualify for another exemption without a minimum salary requirement or whether some changes to their job duties might qualify them for such an exemption.
• Employers should remember that states have wage and hour laws that may differ from the FLSA, and be mindful to be in compliance with state law requirements in addition to the FLSA.
We anticipate that the new regulations will once again put the focus on employers’ pay practices, both going forward and as currently administered.
We are available to assist clients in evaluating compensation practices and responding to the proposed regulations. Please feel free to contact Jonathan S. Krause at JKrause@klehr.com or 215.569.4496 and Chuck Ercole at CErcole@klehr.com or 215.569.4282. You are also invited to our March 19 presentation, which will further explore the issues created by these regulations. You can RSVP to that event here.