The U.S. Department of Labor has published its final rule extending overtime protections to 4.2 million workers previously classified as exempt under the “white collar” regulations of the Fair Labor Standards Act (the “FLSA”). The final rule goes into effect on December 1, 2016. More than half a million workers are expected to be affected on the West Coast alone, with estimates of 392,000 employees in California, 46,000 in Oregon, and 75,600 in Washington.
Now that the dust has settled on the final rule, employers are beginning to take stock of whether, and how much, the new regulations will impact their businesses. While the new regulations are straightforward in some respects, traps abound for the unwary employer when changing employee white-collar classifications and transitioning formerly exempt employees to nonexempt status. Below we outline the key facts you need to know about the new regulations and recommendations for implementing them in your workplace.
Key Changes in Overtime Regulations for Executive, Administrative, and Professional Employees Under the FLSA
Minimum Weekly Salary Level
The new regulations increase the amount of weekly salary necessary for an employee to be overtime-exempt from $455 to $913 through 2019. This is an annual salary of $47,476. The new salary level applies to the executive, administrative, and professional white-collar exemptions.
Use of Nondiscretionary Incentive Payments as Offset
The new exemption regulations allow an employer to offset 10 percent of the required weekly salary with nondiscretionary incentive payments (e.g., bonuses and commissions). This equates to a setoff of $91.30 per week, $1,186.90 per quarter, or up to $4,747.60 per year, under the new salary amount. Nondiscretionary incentive payments must be paid at least quarterly.
If, in the last pay period of the quarter, the sum of the salary plus incentive payments for the quarter does not equal at least 13 times the required weekly salary, the employer may make a one-time “catch-up” payment in the next pay period to meet the required quarterly amount to preserve the exemption. With the weekly salary amount of $913, to meet the salary test for a white-collar exemption, the employee’s combined salary and incentive payments for a quarter must be at least $11,869. This amount will increase in 2020.
Highly Compensated Employee Exemption
The new regulations increase the “total compensation” requirement for the “Highly Compensated Employee” (“HCE”) exemption from $100,000 to $134,004. Oregon and Washington State overtime laws do not include an HCE exemption, however, so the practical effect is that the HCE exemption does not apply in Oregon or Washington.
Both the minimum weekly salary for the white-collar exemptions and the required total compensation for the HCE exemption under the FLSA will be automatically adjusted every three years, with the first adjustment effective January 1, 2020.
Recommendations for Implementing the New Regulations
Employers have six months to implement the new regulations. Any time there is a major change in wage-and-hour laws, the implementation period is a great time for an employer to take stock of its workforce, determine how the employer wants to implement the new regulations with minimal impact to its business, and check for any possible compliance concerns. In addition, training will be key for those employees who will be converted from exempt to nonexempt status under the new regulations. Here are our top recommendations:
1. Consider a Variety of Compensation Options
Employers have a number of options in structuring compensation, including:
Maintaining exempt status by raising the employee’s salary.
Maintaining exempt status by paying the employee a weekly minimum of $913 as a guaranteed “salary credit” (or draw or advance) against future incentive compensation; at the end of a quarter, the salary credit is offset against earned incentive compensation, and the employee receives the excess (if any); the salary credit (draw or advance) is a guaranteed amount, and no deductions are ever made for deficits.
Converting to salaried-nonexempt under the “fluctuating-workweek” regulations; the salary covers regular “straight” time for all hours worked, and only the “and-a-half” overtime premium is owed for hours over 40. Employees must be notified in advance that they are being paid under the fluctuating-workweek methodology.
Some alternative compensation methods can be complex, and we suggest employers consult with an attorney before implementing any method with which the employer is not familiar.
2. Use Opportunity to Review Whether Exemption Also Meets Duties Test
If employers want to keep particular employees exempt by paying the higher salary, this is a good opportunity to review their duties to ensure that they meet all the exemption requirements. Remember, to be exempt an employee must meet both salary and duties tests.
3. Use Opportunity to Review Staffing and/or Salary Levels
Before the new salary regulations take effect, employers may want to review their staffing and compensation levels to determine what makes the best business and economic sense for employees who are close to the new salary threshold. For example, are the job duties best performed by exempt employee(s), or can some work be spread to nonexempt staff to maximize efficiency and reduce overtime? Employers may want to develop budget models to consider alternatives (e.g., increasing salary, paying overtime, or hiring additional employees to minimize overtime costs).
4. Implement Mandatory Breaks for Newly Nonexempt Employees
Exempt employees generally do not get “mandatory breaks,” and they will not be accustomed to taking required meal and rest breaks. Employees who were previously exempt will need to be told about their break rights, and compliance monitoring should be done (at least initially).
5. Revisit Timekeeping Practices
An employer should make sure that formerly exempt employees understand that they must now accurately record time (not just mark down “8 hours regular” or “8 hours sick” on their records), that they be told the importance of keeping accurate records, and that they know how to use the company’s timekeeping system.
6. Watch Out for Off-the-Clock Work by Formerly Exempt Employees
There may be pressure on formerly exempt employees to work off the clock, either from supervisors or from themselves, such as working from home or checking emails on the weekends. Employees need to be told to record all time worked, and compliance monitoring (at least initially) is a good idea.
7. Consider Prohibiting Unauthorized Overtime
Consider requiring employees to obtain supervisor approval in advance before working overtime and prohibiting “unauthorized overtime.” Enforcing this policy means that employees will receive discipline for working overtime if they did not first obtain approval. It does not mean refusing to pay for time worked. Unauthorized overtime must still be recorded and paid.
8. Consider How to Communicate the Change to Formerly Exempt Employees
Some employees have a sense of pride at being salaried-exempt and may look at the change as a demotion. The employer should make it clear that the change is not a reflection on the employee’s status with the company, but is simply required by the new regulations.
The bigger issue involves clearly communicating all the new requirements to these employees, such as keeping accurate time records, taking their mandated breaks, not working unauthorized overtime, and not undertaking off-the-clock work. Don’t just send a memo. Meet with employees and managers, and conduct training in person.
9. Use Opportunity For a Compliance Audit
The six-month interim period is a great opportunity for conducting a broader audit of an employer’s wage practices. Both federal and state wage laws have numerous regulations, which can be arcane, confusing, or tricky when implementing. Even well-meaning employers can make mistakes, such as improperly calculating overtime, failing to track work hours accurately, and so forth. Now is a good time to conduct a broader review of wage practices to look for and fix any potential compliance concerns or make changes to best practices.
Please contact our employment attorneys if you have any questions about the new regulations or other employment law concerns.