DOL Issues New Salary Rule: Now What?

As we predicted last week in “Release of Final DOL Exempt Employee Salary Rule Likely Imminent,” earlier today the U.S. Department of Labor (DOL) issued its final rule increasing the Fair Labor Standards Act’s (FLSA) minimum weekly salary rate for exempt employees to $913 per week (equivalent to $47,476 annually), more than doubling the current minimum of $455 per week (equivalent to $23,660 annually). The new minimum salary level will be indexed for annual increases in the future, beginning January 2020. Additionally, the final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new minimum salary level.

Employers have until December 1, 2016, to comply with the new rule. Although many employers have been aware of and planning for the likely rule changes for months, there has been uncertainty about exactly what the new rule would require and when compliance would be required. That uncertainty is now gone and employers must move quickly to determine how they will handle the change and avoid the potential for significant liability for failure to comply.

FLSA Background

The FLSA generally requires employers to pay non-exempt employees at least minimum wage (presently $7.25 per hour) for all hours worked, plus overtime compensation for all hours worked over 40 per work week. If an employee satisfies all the requirements of at least one exemption, the employee is exempt from overtime. Common exemptions under the FLSA include the executive, administrative, professional, computer and highly compensated employee exemptions, which are commonly known as the white collar exemptions.

To qualify for one of these exemptions, the employee must satisfy a salary basis test and a duties test. Under the salary basis test in the current regulations (which the DOL issued in 2004), most exempt employees must receive at least $455 per week ($23,660 annually) on a salary basis. Also, under the current regulations, one of the requirements of the highly compensated employee exemption is that the employee must receive total annual compensation of at least $100,000.

DOL’s Initial Proposal

On July 6, 2015, the DOL issued proposed regulations proposing to increase the salary basis requirement for the white collar exemptions from $455 to $970 per week ($50,440 annually) and proposing to increase the minimum total annual compensation amount under the highly compensated employee exemption from $100,000 to $122,148. The public had 60 days to submit comments to the DOL regarding the proposed regulations, so the public comment period expired in early September 2015. The DOL received more than 270,000 comments during the public comment period and ultimately submitted its final version of the rule to the White House Office of Management and Budget in March 2016.

The New Rule

Under the new rule, which becomes effective December 1, 2016, most exempt employees must now receive at least $913 per week ($47,476 annually) on a salary basis. Also, to meet the highly compensated employee exemption under the new rule, the employee must receive total annual compensation of at least $134,004. It is important to note that the new rule does not change any of the duties tests, nor does it change the fact that the minimum salary requirement does not apply to outside sales employees, teachers or employees practicing medicine or law.

What To Do?

Although the new rule does not increase the minimum salary as much as the DOL originally proposed in July 2015, the increase to $913 per week ($47,476 annually) is very significant. The DOL estimates that there are approximately 4.2 million currently exempt employees who must be reclassified as non-exempt and be paid overtime in the future unless their base salaries are increased to meet or exceed the new minimum salary, not just this year but on an ongoing basis as the minimum salary increases (which is scheduled to occur every three years, beginning on January 1, 2020). The Obama administration estimates that the new rule will increase wages for workers by $12 billion over the next 10 years.

There are several options for employers, including (1) raising salaries to maintain employees’ exempt status, or (2) converting affected exempt employees to hourly or salaried non-exempt status and (a) limiting permissible overtime work, (b) cutting base compensation to offset anticipated overtime costs, or (c) hiring additional employees to handle the additional work no longer being performed by existing employees as a result of limiting overtime hours. Each option has costs, complications and risks.

Many employers have been planning for the new salary threshold, but whether or not planning has occurred employers should take the following steps now:

Step 1: Analyze positions presently classified as exempt to make sure they are in fact exempt under the current regulations.

If a position is non-exempt under the current regulations, it will be non-exempt under the new regulations. But a position that is currently exempt under the existing regulations may not be exempt under the new regulations (if, for example, the salary received by the employee will fall below the new minimum salary threshold under the new regulations). Therefore, employers should identify each position presently classified as exempt and make sure that it is in fact exempt under the current regulations. If an employer wants the analysis to be protected by the attorney-client privilege, then it should consult with counsel to conduct the analysis. If any positions are misclassified as exempt, then those positions should be re-classified as non-exempt. But before reclassifying any positions, employers should consider the potential impact of such reclassification, including how to address potential claims based on alleged misclassification of the positions as exempt prior to the reclassification.

Step 2: For positions classified as exempt under the current regulations, make sure the job descriptions accurately reflect the exempt nature of the position.

Employers could face lawsuits or DOL audits at any time. In the event of a lawsuit or DOL audit, it is important that job descriptions for exempt positions accurately state the job duties and don’t give the misimpression that the position is non-exempt. Now is a very good time to review and update job descriptions for exempt positions.

Step 3: Identify currently exempt positions that will no longer satisfy the minimum salary test under the new rule and decide what to do about those positions.

Of the positions correctly classified as exempt under one or more of the FLSA's duties tests, identify those that presently receive a salary of less than $913 per week. These are the positions that will no longer be exempt as of December 1, 2016, if the employer does not increase the salary. For these positions, employers should develop a plan to either (1) continue to treat the position as exempt by increasing the salary to at least $913 per week or (2) reclassify the position as non-exempt. Both options have advantages and disadvantages. Under option (1), the employee would not need to record and report all hours worked and the employer would not need to pay overtime compensation (just as is the case today with respect to exempt employees), but the employer would need to increase the salary to at least the new minimum salary. Conversely, under option (2), the employer would not need to increase the salary to at least the new minimum salary, but the employee would need to record and report all hours worked and the employer would need to pay overtime compensation, and the employee’s benefits (such as paid time off or paid holidays) could be adversely impacted by the reclassification unless the employer also changes its benefits practices. Because each position is different, employers may want to make this decision on a position-by-position basis. For example, if a position does not work more than 40 hours per week or it is feasible to restructure a position to work no more than 40 hours per week, it may be better (depending on the facts) to reclassify the position as non-exempt instead of increasing the salary to $913 per week. In any event, a thoughtful communication plan should be developed to accompany any reclassification of positions, changes in compensation, or other changes implemented as a result of the new rule.

For assistance in addressing this significant change, contact a member of the Faegre Baker Daniels employment law group.