Breaking Down the Dept. of Labor’s Proposed Rule Changes

November 10, 2015 - 8 minutes read

The Department of Labor’s proposed rule changes to the Fair Labor Standards Act (“FLSA”) has enveloped the blogosphere of late. Here, I am breaking the changes down to their most basic for business owners – giving you the information you need to know and suggestions for appropriate response.

First, the basic background – what you should already know:
– The FLSA establishes minimum wage and overtime pay for employees in the private sector and in Federal, state, and local governments.
– Some employees are “exempt” from the FLSA, meaning that they are not subject to minimum wage requirements and are not entitled to overtime pay for hours worked over forty (40) per week.
– Covered non-exempt employees are entitled to minimum wage of not less than $7.25 per hour.
– Covered non-exempt employees are entitled to overtime of at least one and one-half times their regular rate of pay for any hours worked over forty (40) in a given workweek.
– The FLSA does not require employers to pay workers falling within certain white collar exemptions minimum wage and overtime.

Today (before the proposed rule changes), a white collar employee qualifies for exemption from the FLSA’s minimum wage and overtime requirements if the employee meets the following tests:

– “Salary Basis Test” – 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 Level Test” – Employee is paid at least $455 per week (equivalent to $23,660 per year); and
– “Duties Test” – Employee’s job duties must involve primarily executive, administrative, or professional duties, as described elsewhere in the regulations.

Second, the “proposed” changes – what you need to know:

“Proposed” is as good as “final.” While the DOL opened the proposed changes up for commentary for a sixty (60) day period, which ended Sept. 4, 2015, the general consensus is that the final rules will differ little, if any, from the proposed rules. Once the rules go into effect, I anticipate a 3-6 month window before employers are expected to fully comply.

What is Changing, What will Remain the Same?

– “Salary Basis Test” will not change
– “Salary Level Test” will change.
– “Duties Test” will not change BUT, the DOL is seeking comments on whether the current duties tests are working as intended. In other words – a change is on the horizon.

Change to “Salary Level Test”:

Removes $455 per week, $23,660 per year requirement and sets the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers. For 2015, the 40th percentile is $921 per week, $47,892 per year. In 2016, $970 per week, $50,440 per year. In other words, if you employ a worker making less than $970 per week or $50,440 next year, then you cannot classify them as exempt and must start paying overtime for any work over 40 hours per week.

The DOL is also proposing that this 40th percentile be automatically increased each year to ensure the compensation/salary level is not eroded by inflation.

Finally, how should you respond?
Be proactive. Familiarize yourself with the proposed changes and call counsel.

Employers should take advantage of the final rule promulgation period to get their “ducks in a row,” so to speak, especially since the adoption of the rule change is all but inevitable. It is estimated that 5 million white collar workers will become newly entitled to overtime protection because of the increase in the salary threshold. If you operate a business, it is highly likely that some of these 5 million workers are your employees. Remember, the FLSA does not provide an exemption even for small businesses, so, if your business has an annual gross volume of sales made of business done of $500,000 or more – keep reading.

Now is the time to start planning the appropriate response or risk running afoul of the regulations. Should you simply change the policies within your Employee Handbook, reclassify the necessary workers, continue business operations as usual, and start paying overtime to anyone making less than $970 per week, $50,440 per year? Or, should you stop with reclassification and then prohibit overtime without express authorization? Perhaps you would rather reclassify workers making below $970 per week, $50,440 per year, and then cut their pay more to account for the additional overtime you anticipate they will accrue? Side note: this option will not boost employee morale. Alternatively, maybe you give raises to any employee falling just below the threshold to ensure they remain exempt and to avoid any overtime payments. Determining which decision is in your business’s best interests requires you to evaluate a number of factors – business operations, employee classifications, annual overtime accrual, etc.

Early evaluation of your business operations is not only essential to this rule change, but is especially necessary in light of the anticipated changes to the “Duties Test.” Specifically, the DOL is calling for comments on whether the “duties test” should require that a certain amount of an employee’s time be spent performing exempt duties, as opposed to non-exempt duties, to fall outside of the FLSA’s minimum wage and overtime requirements. For instance, the DOL has asked whether California’s approach should be followed – there, employees must spend 50% of his or her time performing exempt duties to satisfy the test. Employers should begin considering whether some of the non-exempt duties performed by otherwise exempt employees will one day remove the exemption and thus, consider reassigning that work to hourly employees.

I highly recommend consulting with employment counsel to ensure that you make the right decisions for your business and, equally as important, learn how to control the message to workers to avoid an employee relations nightmare.

This post was written by Jennifer M. Lankford who is an associate attorney at Thompson Burton, focusing her practice on labor and employment law.