The wait is finally over! Tonight the Department of Labor (DOL) announced that it is releasing the final rule tomorrow, May 17, 2016, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” which will mandate the new minimum salary level to be $913/wk or $47,476 per year. The DOL’s Fact Sheet was released tonight, along with a wealth of information that is available such as Q&A, Comparison Table of the proposed rule and final rule, a Small Entity Compliance Guide, a Guidance for Private Employers, and many others. Commonly referred to as the “white collar exemption”, the Fair Labor Standards Act (FLSA) provides that all employees subject to the FLSA are entitled to overtime, unless they are otherwise exempt. The actual rule was not released (go figure), so I’ll certainly post an update tomorrow (probably when you are reading this anyway as I’m having my wage and hour geek-out tonight). Although, according to one of the fact sheets, the Final Rule should be posted here: dol.gov/whd/overtime/final2016.
In order to exclude an employee from minimum wage and overtime requirements, three thresholds must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work (the “salary basis test”); (2) the employee’s salary must be a minimum amount (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the FLSA (the “duties test”). Neither the salary level test nor the salary basis test applies to outside sales (I stress outside). The Rule does not change the duties test.
Increased Salary Level & 3 Year Automatic Updates
As I wrote about in my earlier post when the rule was in the approval phase, the current threshold for executive, administrative or professional employees is that the employee must be paid a salary of at least $455/week ($23,660/year). The significant change is that this base threshold is now increased to $913/week ($47,476/year) effective December 1, 2016. For Computer-related employees, they may be paid the $913/wk or at least $27.63/hr. The threshold for “highly compensated employees” (these folks do not need to meet the duties test because it is presumed they will meet it since they are highly paid) is increased from $100,000/year to $134,004/year effective December 1, 2016. Notably, unlike before (the previous thresholds were set in 2004), the new rule provides that the salary and compensation thresholds will be automatically updated every three (3) years, the amounts of which will be posted in the Federal Register at least 150 days prior to their effective date.
Also, keep in mind that there are, as always, quirks and nuances to the new rule and this blog is just a general overview of what’s to come. For example, employees may be paid on a “fee basis” rather than a “salary basis”. In this way, the employee is paid an agreed sum for a single job, no matter how long it takes. However, to determine if the fee payment meets the threshold, you consider the time worked on the job and determine if that payment is at a rate that would equal at least $913/week if the employee worked 40 hours. Thus, a computer programmer is paid $800 to fix an app and takes 10 hours to do so, this meets the test as $800/10=$80/hr x 40 = $3,200 (much more than $913).
Don’t Forget About the Duties Test – the Employee Must Be “White Collar”
Regardless of an employee’s salary, an employee may make more than the threshold amount and still not qualify for the exemption. Remember this is called the “white collar” exemption for a reason – think the opposite of Jeff Foxworthy and his Blue Collar Comedy Tour. Though, that is good stuff. Anyway, in order to qualify, the employee must: (1) have a primary duty of the performance of office or non-manual work directly related to the management or general business operations; (2) have independent discretion with matters of significance or supervise two or more employees; or (3) be in an advanced field of science or other specialized prolonged education background, a specialized creative artistic field, a school teacher, or a computer analyzer, programmer or engineer. Under the duties test, the employee must: (1) be paid on a salary basis; (2) be paid at least a fixed minimum salary per week; and (3) meet certain requirements as to their job duties. Thus, while all eyes are on the salary threshold changing, don’t forget that the salary doesn’t matter if the employee is not performing the duties required to meet the exemption! As Jeff Foxworthy might say, you may be a blue collar employee if…[if you can fill in that blank and it sounds blue collar…chances are it is blue collar].
What Options Do Employers Have?
Employers have many options for handling this new regulation. An employee whose status will change based on not meeting the new salary thresholds must be paid time and a half (1.5) for all hours worked over 40 in a week (unless they are paid under the fluctuating workweek method, but that’s a whole other issue for mostly seasonal employers), but there are several ways to minimize the impact on a business and employees. All, however, will need record each hour worked.
One option that is often overlooked is to pay an employee a salary plus overtime. This is especially attractive to employees who would take a reclassification as a “demotion”, or who are in professional positions, but say for a smaller employer that just can’t pay the threshold amount. In the weeks that the employee works less than 40 hours, they still get their salary. If they work more than 40 hours they get their salary plus overtime based on their regular rate. Yes, the employer ends up paying more, but this is a very common occurrence in middle management, new professionals, or long-term highly valued support staff or other employees. The employer could reduce the employee’s salary as well to account for customary overtime (so the employee is still ultimately paid the same).
Another option is to reclassify the employees as hourly and pay for each hour worked, no more or no less. This is what the DOL assumes employers will do. An hourly employee is going to have fluctuating hours each paycheck typically – some weeks he or she may be paid less than 40 hours, some weeks more (unless you prohibit overtime which is also okay so long as you pay when they go over – you can still discipline for that). This is typical for a “blue collar” type worker.
Employers may also change the employee’s regular rate of pay so that the total weekly earnings don’t change after overtime is paid, which I touched on above. For example, if an employee is currently making $40,000 ($19.23/hr) but regularly works 50 hours a week, the employer could reduce the employee’s regular rate to $14/hr. ($29,120/yr), with an overtime rate of $21/hr. ($10,920/yr). This same employee would still take home $40,040. The employee is paid the same and the employer is in compliance with the FLSA.
A very obvious solution is to prohibit overtime. So, take the employee’s salary and divide by total hours worked in a year (2080) and that is the employee’s hourly rate. Keep that the same, but have a policy prohibiting overtime. If the employee works overtime, you may discipline the employee, however you must still pay the overtime.
Finally, an employer could do several combinations of the above, based on your business model. The key is that the employee, regardless of which option is selected, must be paid an hourly rate for each hour worked, including overtime. The employer is responsible for maintaining records of hours worked, but can (and should) require all non-exempt employees to record hours worked.
Score One for Employers! Paying Nondiscretionary Bonuses Will Not Lose the Exemption – But Be Careful
The revisions change one source of much confusion and conflict – whether an employer may pay an exempt employee a (no less than) quarterly nondiscretionary bonus, without violating the salary basis requirement. The new rule makes it clear that so long as the employee makes the minimum $913 per week, additional non discretionary compensation up to 10% of the week wage (no more!) does not lose the exemption or violate the salary basis requirement (so long as the employee is guaranteed at least the minimum weekly threshold). For example, an employer may pay a salary of less than $913 plus commissions (in no case less than 10% less of $913 which is $821.70/wk), but can only credit up to 10% of those commissions toward meeting the $913 salary level (and even if the commissions are not met to bring it up to $913, the $913 must be paid at a minimum).
Note, the term “nondiscretionary” – this is not the same as discretionary bonuses – those cannot be used to satisfy the salary level. The difference? Discretionary bonuses are typically unannounced bonuses, such as holiday bonus, had-a-great-year bonus, or anything unexpected by the employee. A nondiscretionary bonus is typically incentive plans, commissions, and written “carrots” so to speak to induce the employee to work more efficiently or meet a certain goal.
Finally, one trap to be careful for is payment of the nondiscretionary bonus, which must be made at least quarterly. If the employee does not earn enough in nondiscretionary bonuses and incentive payments in a quarter, the employer may make a “catch up” payment at the end of the quarter – so long as that payment is made the following payroll. If the employer fails do this, the employee loses the exemption and is entitled to overtime for that quarter.
Don’t Forget to Layer Bonuses Into Overtime
Another thought – don’t forget about bonuses for non-exempt employees. If a non-exempt employee is paid a non-discretionary bonus, that bonus must be layered into the corresponding pay period and included in the “regular rate” (hourly rate) in order to determine the rate for overtime. This is something that few employers realize, and many dread as an administrative nightmare. Not only is the issue of a bonus discretionary or non-discretionary, but then how it affects the regular rate can be daunting. For example, after paying a non-discretionary bonus, the employer has to go back and pay an additional amount for the overtime hours worked. If you want a quick overview – the DOL has some good examples.
Be Careful of After-Hours Work, Travel Time, and Other Flexible Work Schedules
Reclassifying workers may seem not so bad after reading the above – I’m not delusional! Understandably, there is an entire human aspect to consider of the perceived “demotion”. This is why I appreciate so greatly what HR professionals do. However, keep in mind that while you may be able to ultimately pay them the same compensation based on one of the methods above, that person’s flexibility also has to have some adjustments – most of which they will not like as they perceive themselves (and they are!) to be professionals. For example, employers should be very cautious of after-hours, unrecorded work. Your policy should be clear that non-exempt employees are to record all hours worked – wherever worked. It must disallow off-the-clock work. These employees are used to working whenever needed – with cell phones, iPads and laptops, the line between home and work is quite blurred. Keep in mind too, that there are very complex travel time regulations and how to properly pay a non-exempt employee for travel time (sounds like a future blog to me).
Now, however, the employer has the duty to capture and record all “hours worked”. Having a professional employee (who doesn’t meet the requirements above) now record hours worked is certainly going to cause some rebellion and stress in the workplace. Employers should consider whether to continue to allow flexible work schedules and the like, where it is harder to monitor employees’ work time. Because, at the end of the day, it is the employer’s responsibility for keeping records of all hours worked – not the employee. Too often it is the employee who “voluntarily” doesn’t record hours that, a year or so later after getting passed up for a promotion, then decides that she or he was “forced” to work off the clock, or the employer “knew” that it was done and never said anything. So, tread very cautiously and consider modifying work practices to ensure all time is captured. That being said, an employee doesn’t literally have to punch a clock, and there are other methods for recording time, but certainly is going to be problematic in any event.
What About Deductions from Pay?
As we always caution, should you treat an exempt employee like a non-exempt employee, you risk losing the exemption. Deductions are only allowed when the employee is absent from work for one or more full days for personal reasons other than sickness or disability (unless there is a bona fide plan, policy or practice of providing paid sick leave); to offset amounts paid as jury or witness fess or for military pay; for penalties imposed in good faith for major safety infractions; or for unpaid disciplinary suspensions of a day or more due to workplace conduct rule infractions. 29 C.F.R. 541.602. In other words, if it quacks like a duck, walks like a duck…it probably is a duck.
43 Million Workers Will Be “Misclassified” – Time to Audit
The Department of Labor estimates this regulation revision will affect 43 million workers, 21.4 of them misclassified as executive, administrative or professional employees. Thus, now is the perfect time to do an internal wage and hour audit with employment law counsel and get your ducks in a row. It is not every year that employers who may have one (or several) employees on the fence, have a good reason to look at and reclassify employees. It is not usual for an employer during a wage and hour lawsuit to look at payroll practices and then realize that as the company has grown or job descriptions change, employees may not be properly classified. How do they fix it? Enter the regulation overhaul. Now is the time to do that audit and make a sweep of your salaried classifications. It’s here, so it is time to embrace the change.