Pay Raises or Pay Overtime: The New DOL Salary Level Test
Thomas W. ScrogginsRosen Harwood, P.A.
Bank of Tuscaloosa PlazaSuite 200
Tuscaloosa, Alabama 35403‐3206Telephone (205) 344‐5000
Fair Labor Standards Act• Originally passed in 1938 as part of President Roosevelt’s effort to revive the U.S. from the Great Depression.
• Federal Minimum Wage: Currently $7.25/hour.• Overtime: 1½ times the regular rate of pay for all hours over 40 hours in a work week.
FLSA Application
• Applies to employers who have more than $500,000 in annual gross volume of sales.
• Also must be engaged in interstate commerce, but in modern America almost everyone meets this low threshold.
• No “small business exemption.”• No “non‐profit or religious exemption” but can be restricted to commercial activities or only employees engaged in interstate commerce.
FLSA ExemptionsThe FLSA mandates that:• Covered, non‐exempt employees receive overtimepay after working 40 hours in a workweek.
• At a rate not less than one and one‐half their regularhourly rate of pay.
Exception:• Certain executive, administrative, and professionalworkers are exempt from the FLSA’s overtime payrequirement.
• This is generally referred to as the FLSA’s “whitecollar exemption.”
Three Tests for Exemption
Must meet all three1. Job Duties – What must exempt
employees do?2. Salary Level – How much?
(currently $23,660 annually)3. Salary Basis – How paid and
when?
Highly Compensated ExemptionCertain highly compensated non‐salary employees were exempt from the overtime pay requirement:
• If they are paid total annual compensation of at least $100,000.
• If they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.
Exempt Salary Level Increase• Started with President issuing a Presidential Memorandum to Department of Labor on March 13, 2014.
• Dept. of Labor issued Notice of Proposed Rulemaking on July 6, 2015.
• Public comment period closed on September 4, 2015.
• Impetus was that current salary level of $23,660/year was below the federal poverty level for a family of four ‐ $24,008
Implementation• On May 18, 2016, the United States Departmentof Labor (“DOL”) released the final rule updatingthe white collar exemptions in the Fair LaborStandards Act (“FLSA”).
• These regulations will have widespreadimplications to the current overtime rulesgoverning nearly every employer in the country.
Why The Increase in Salary Level?
“Right now, too many Americans are working long days for less pay than they deserve. That’s partly because we’ve failed to update overtime regulations for years – and an exemption meant for highly paid, white‐collar employees now leaves out workers making as little as $23,660 a year – no matter how many hours they work.”‐ President Barack Obama.
Exempt Level Salary Increase
• In 1975 62% of full time salaried workers were below the salary level and thus eligible for overtime.
• Now only 8% of full time salaried workers fall below the salary threshold.
• Increase is expected to impact 5 MILLION workers.
• In Alabama it is projected to impact 70,000 employees.
Exempt Salary Level Increase
• Sets standards salary level at the 40th percentile of weekly earnings for full‐time salaried employees ($913/week or $47,476 annually).
• Sets salary level for highly compensated employee exemption at 90th percentile of weekly earnings ($134,004 annually)
• Establishes ability to automatically update salary and compensation levels going forward every three years starting January 1, 2020.
Employee Bonuses and Commissions• Consider Whether Bonuses Will Count Toward the Minimum
Salary Level– DOL will allow nondiscretionary bonuses and commission to satisfy up to 10% of the minimum salary level.
– Means that the weekly salary must be at least $821.70 (90% of the minimum) and the rest can be made up with bonuses.
– $42,729 salary + $4,747 bonus/commission = compliance– Bonus must be paid quarterly or more frequently – NOT ANNUALLY.
– A “catch up” payment can be made at the end of each quarter if needed to satisfy the minimum salary level.
So What Now?
• Millions of currently exempt, salaried employeeswill be affected by the increased salary threshold.
• Employers will be forced into a decision to eitherreclassify these employees as non‐exempt orraise their salary to the new exemption rate.
• Expected to transfer about $1.2 BILLION in higherwages from employers to employees.
Who Is Likely to Be Affected
• Mid‐level Managers• Convenience Store Managers• Fast Food Store Managers and Assistant Managers
• Department heads who meet the duties test for exemption but are paid less than $47,476 in salary
Compliance Timeline
• The effective date of the final rule isDecember 1, 2016. The initial increases to thestandard salary level will become effective onthat date.
• Future automatic updates to those thresholdswill occur every three years, beginning onJanuary 1, 2020. What will this number be inthree years?!?!
ACT NOW!
• Employers will only get six months to comply.
• Reclassifying employees can take a long time.
• Business partners will need to understand the possible budgetary impact of a salary level increase.
What to do?• Identify Those Who Need to be Reclassified
– Exempt employee may need to be reclassified as nonexempt if they
• Earn less than $60,000 per year (because of annual increases)
• Fall into company’s 2‐3 lowest pay grades because this is where misclassifications occur
• Hold same position as many other employees in same company because of likelihood of collective action lawsuit
• Work as accountants, assistant managers, sales and support workers, help desk employees, customer services representatives, technicians and business analysts
What To Do?
• Develop New Compensation Plan for Reclassified Employees– Compare cost of giving raises against cost of reclassifying employees as non‐exempt and paying overtime.
– Need to know total annual compensation and number of hours worked per week on average.
– From that you can derive an hourly rate that will produce roughly the same annual labor cost.
What To Do?• Review Wage and Hour Policies and Processes– If reclassifying must implement timekeeping processes
– Time must be accurately tracked and documented
–Review policies on unauthorized overtime, meal and rest breaks, travel time, and mobile device usage.
What to Do?
• Communicate Changes– Figure who, what, when and what format to use to deliver the news to the affected employees.
• Train the Reclassified Employees and Their Managers– What is compensable time?– What is policy regarding overtime?– Where to go with a complaint about missed pay?
Enforcement
• DOL is asking for $50 million and 318 new full time employees to help boost enforcement of the FLSA
• Targeting health care, hotels, agriculture, day care, restaurant, garment manufacturing, guard services, janitorial services, and temporary service agencies.
• Also franchisors, independent contractors, and labor brokers.
“You’re Now Non‐Exempt.”
• It’s not a reflection on them or their value to the organization.
• Make sure to tell them they will be paid time‐and‐a‐half for overtime hours.
• Help them manage after hours work by offering time off later in the same work week.
• Give as much advance notice as possible.
Possible Adverse Effects
• Increase in wage and hour lawsuits• Double damages and attorney’s fees are available for FLSA claims
The time to address this matter is NOW ‐ not in November just before the new regulations become effective.
Questions or Comments?
