On March 15, 2016, the U.S. Department of Labor (DOL) sent its final rule revising the white collar and highly compensated employee overtime exemptions under the Fair Labor Standards Act (FLSA) to the Office of Management and Budget (OMB). Review by OMB typically takes between 30 and 60 days and is the last step before publication in the Federal Register. Upon publication in the Federal Register, Congress has a 60-day review period before the rule goes into effect. This means that the final rule could be released this spring and would go into effect this summer. Will you be ready?
Under the current FLSA regulations, an employee must satisfy the following three criteria to qualify for the white collar exemptions to the FLSA overtime requirements:
- 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 performed (salary basis test).
- The amount of salary paid must meet a minimum specified amount or threshold (salary level test).
- The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (duties test).
The current salary threshold for the white collar exemptions is $455 per week ($23,660 per year). Based upon the proposed rule issued by the DOL last July, we expect the final rule to set the salary threshold for the white collar exemptions at the 40th percentile of weekly earnings for full-time salaried workers. For 2016 this amount would be $970 per week ($50,440 per year).
Current FLSA regulations also provide an exemption for certain highly compensated employees who:
- Are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis); and
- Customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.
Based upon the proposed rule, we expect the highly-compensated employee salary threshold to be set at the 90th percentile of earnings for full-time salaried workers ($122,148 per year).
Lastly, we expect the final rule to follow the proposed rule in establishing a mechanism to update the salary thresholds on an annual basis using either a fixed percentile of wages or the Consumer Price Index for All Urban Consumers (CPI-U).
How to Prepare for the Final Rule
Even though we do not know what the final rule will look like, there are still actions employers should be taking now to prepare for its release:
- Review and update job descriptions. While not proposing any specific changes to the duties test, the proposed rule did indicate that there may be changes to some parts of the duties test. In addition, the DOL requested comments about a percentage threshold test when evaluating whether an employee’s duties are primarily exempt or nonexempt in nature. As a result, employers should review their job descriptions to make sure they accurately reflect the work performed by employees on a daily basis and ensure that employees who are currently classified as exempt meet the requirements of the exemption.
- Consider requiring exempt employees earning less than $50,440 per year to start tracking their weekly hours worked. Since exempt employees do not typically record their work hours, it may be difficult for them to accurately estimate the overtime hours they have worked and anticipate working in the future. Having them track their work hours will provide the employer with valuable information when it comes to budgeting.
- Analyze the salaries of employees who may be affected by the final rule and start budgeting for increased salaries and overtime costs.
- Determine which employees are exempt at an annual pay rate of $50,440 and below.
- Review with your managers or exempt staff the average hours that each employee in the above group works beyond 40 hours per week.
- Calculate the average number of overtime hours of your current nonexempt workers on an annual basis.
- Based on these two numbers (from steps 2 and 3 above), determine the average number of hours that would be considered as overtime (over 40 hours in a workweek, or eight hours in a day for some states) for the exempt workers; the aggregate of both is an estimated average of overtime hours that the exempt worker may work if reclassified as nonexempt.
- To calculate the overtime budget, take the average hourly rate of all exempt workers at the annual rate of $50,440 and below, multiply the hourly rate by 1.5, and multiply that number by the estimated average overtime hours calculated in the last step to determine the proposed overtime budget for the current exempt workers that may be reclassified as nonexempt pending implementation of the proposal.
- Review your leave policies (for example, sick and vacation) and assess how each may be impacted as they pertain to accrual differences for exempt and nonexempt workers and how the company will best manage the transition from one accrual method to another. For example, if an exempt worker accrues based on weeks worked up to three weeks of paid time off (PTO) a year, but a nonexempt worker will only accrue for hours worked up to two weeks of PTO a year, the company may experience frustrated workers and face retention concerns due to a loss in benefits under the leave policy. Supervisors and managers are currently exempt and managing nonexempt workers today may end up nonexempt leaders tomorrow, and this may lead to frustration for those supervisors and managers. Management would be wise to be prepared to support concerned employees through this change.
ThinkHR will continue to monitor and report on any developments regarding the final rule.