On June 30, 2015, the United States Department of Labor, Wage & Hour Division released to the public proposed regulations for the revision of the Fair Labor Standards Act (FLSA). These proposed regulation changes were published on July 6, 2015 in the Federal Register. They were available for public comment until September 4, 2015. A date for implementation of the proposed changes is most likely to occur in 2016 between February and August.
What is proposed to change?
The proposed regulations will change the minimum salary level that has to be paid to a currently exempt employee in order for them to meet the first step of being considered “exempt” from being paid overtime.
The current salary level for an employee to be considered exempt is $455 per week, or $23,660 per year. Obviously this is very low; in fact it is below the poverty level for a family of four. Being paid on a salary basis at that level is the first test of being an exempt employee. Another qualification for being considered an exempt employee is meeting the “duties” test where an employee must be performing certain duties as defined by their category of exemption. These categories include the executive exemption, which generally includes managers and supervisors; the administrative exemption, which includes white-collar positions where the exercise of discretion and independent judgment is necessary; the professional exemption, which includes the learned professional, i.e., doctor, engineer, architect, teacher, and the creative professional, that person who exhibits creativity, imagination, originality or talent; the computer professional; and the highly compensated employee, this includes the individual earning more than $100,000 and performs some aspect of exempt duty; and lastly, the outside sales representative that has to meet no salary requirement.
The Proposed Changes
Rather than fixing a single salary level, the proposed regulations establish the new salary requirements at 40% of the weekly earnings of all salaried employees in the United States. By the time this proposal goes into effect that level is anticipated to be $970 per week or $50,440 per year.
This means any currently exempt employee that is earning less than $50,440 will automatically have their exempt status removed and they will be overtime eligible as of the effective date of the changes.
If you are one of the companies that have highly compensated employees, under the proposed definition, this $100,000 compensation level will change to $122,148.
What needs to be done?
First, this would be a good time to review whether or not employees you have classified as exempt are truly exempt. Too many employers make the mistake of improperly classifying employees as exempt solely on the basis of the fact that they pay them a salary. Salary is a method of wage payment and not a classification of overtime eligibility. There are numerous companies that have employees classified as non-exempt yet they pay them a salary. Non-exempt employees do not have to be exclusively hourly employees. So even if you have an employee who is going to make the $50,440 salary level they may not be properly classified on the nature of the duties required to be classified as exempt. If you have questions about a particular employee, HRO-Partners can assist you in making this determination.
Remember, titles don’t count. Determination is based on the job description and the actual duties performed. If you have not updated your job descriptions lately, now is the time to begin the process. HRO-Partners assist you in this process.
Preparation steps that need to occur NOW
- Identify all current employees that are classified as exempt (not currently eligible for overtime) that are making less than $50,440 per year.
- Determine how close these employees are to the threshold level.
- Determine how many potential overtime hours that employee worked in the past year.
- Calculate the cost of that overtime based on time and a half calculations.
- Determine if it is more cost effective to increase the employee to the $50,440 level or to pay the anticipated overtime.
- For those employees where it does not make economic sense to raise them to $50,440, it will become necessary to determine how you will actually record their time worked. Once these employees are declared non-exempt employees (eligible for overtime) you must accurately track actual time worked.
- Communicate the outcome of your research to your Management Team who can then determine budgetary needs.
- Institute a system of checks and balances to ensure that the behavioral change of tracking time has actually occurred.
- Monitor the annual Consumer Price Index to ensure that exempt employees remain exempt and whether further adjustments need to be made.
- Develop a communication strategy as soon as possible. Involve your leadership team, managers, and supervisors. The message needs to be clear and concise. HRO-Partners can also assist you in this process.
Accurately tracking time of newly re-classified employees will also be important. You can accomplish this using paper time sheets or you can use technology including mobile devices. The important consideration is to find something your employees will adapt to most easily. HRO-Partners can refer you to any number of providers.
Issues not yet decided
The DOL also sought input on whether or not to consider nondiscretionary bonuses in the calculation of the total rate of pay. Many companies utilize a pay system that might present a portion of the employee’s pay to be “at risk”. In other words, their pay depends on the achievement of goals for which they can potentially receive sometimes large bonuses. The proposed changes do not allow bonuses to be used to arrive at the $50,440 mark.
An additional issue involves sales positions. Currently, inside sales have a high hurdle to meet to be considered exempt. A number of companies have said that the realities of the world have changed the nature of sales such that outside sales representatives spend a great deal of time selling via the Internet and may not qualify for the old definition of sales exemption.
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