Overview of Anticipated Changes

In July 2015, the Department of Labor released proposed revisions to the Fair Labor Standards Act (FLSA) overtime exemption rules.  Among these changes is a proposed increase to the minimum salary that an employee must be paid to be exempt from overtime laws.  Currently, exempt employees must be paid at least $455 per week or $23,660 per year.  Under the proposed rules, the minimum salary for exempt employees would double with exempt employees being paid at least $970 per week or $50,440 per year.  Therefore, employers will be required to pay overtime for most employees earning less than $50,440 per year.

[1]

Additionally, the Department of Labor is proposing raising the minimum salary requirements for employees who are currently exempt as “highly compensated employees.” The new minimum salary for highly compensated employees will be raised from $100,000 in total annual compensation to $122,148.

The proposed changes have not yet been finalized, and it is not clear when these changes will take effect.  Nevertheless, employers should be prepared for these changes to occur sometime in 2016.

TO DO

Here are some steps that employers can take now to prepare for these changes:

  1.   Review Pay Information For Current Exempt Employees

Any employee currently categorized as exempt and earning below $50,440 per year may be affected by the changes.  As a preliminary step, we recommend reviewing how many current employees fall within this category and their work hours.  If these employees rarely work more than 40 hours per week in their current roles, you may not need to make significant changes to your pay structure.  However, you will need to begin keeping track of their hours and reclassify them as hourly.

  1.   Consider Potential Options for Employees Who Will Be Reclassified as Non-Exempt

For employees who will be affected by these changes, employers have a number of options to consider.  These options include:

  • Reclassifying these employees as non-exempt, and paying overtime at 1.5 times their current hourly rate.

This option may make sense for employees who rarely work more than 40 hours per week in their current roles.

  • Assigning each employee a pay rate that reflects the number of hours the employee works.

For example, if you know the employee regularly works 45 hours a week, you can set a base hourly rate and corresponding overtime rate that approximates the employee’s current overall compensation.  In doing so, you should be careful not to reduce pay rates below the state minimum wage.  While the federal minimum wage remains $7.25, many states have recently enacted higher minimum wages, including Massachusetts ($10), New York ($11 effective 12/31/16; increasing to $15 by 2018), and California ($10; increasing to $15 by 2022).  Employers should be careful not to reduce an employee’s hourly wage below their state’s minimum wage before taking overtime into account.

  • Eliminating or reducing discretionary bonuses and incorporating these bonuses into regular pay.

The FLSA does not consider bonuses when calculating the salary threshold for exempt employees.  If employees are earning bonuses, incorporating these bonuses into regular pay or overtime pay could reduce the impact of the FLSA changes.  However, employers should also be wary of giving hourly employees bonuses, as these typically effect the base rate and correspondingly the overtime rate for the weeks in which they are given.

  • Eliminating or reducing overtime hours.

This may require changes to staffing models and business hours.

  • Increasing salaries above the $50,440 threshold.

Any exempt employee earning more than $50,440 can remain exempt and will not require overtime pay.  If you have employees who are currently earning salaries just under the new threshold, the best option may be increasing their pay above the threshold so they remain exempt.  Of course, whether you have properly classified the employee as exempt in the first place is beyond the scope of this Newsletter.  However, in summary, employees must satisfy various tests before they can be properly classified as exempt, in addition to meeting the minimum salary requirements.  The most common of these tests are Professionals, Executives, Administrative Employees, Outside Sales People, and some Computer Professionals.

  1.   Be Aware of After-Hours Technology Use

Employers should pay special attention to after-hours technology use by employees who may be reclassified as non-exempt under the new regulations.  Responding to emails, texts, and phone calls, posting on social media (at the company’s behest), or logging on to address an urgent request after business hours are all considered work hours. Consequently, they must be recorded and may require overtime pay.

Employers should consider establishing new policies regarding after-hours technology use and taking steps to avoid the practice.  These policies may include new time keeping protocols, training managers on the new regulations and boundaries, prohibiting after-hours technology use by hourly employees (although if they defy this prohibition, it is still work time), treating this time as an extension of the workday and paying overtime accordingly, or ensuring that employees who are required to be available after-hours are classified as exempt and paid at least $50,440 per year.

POTENTIAL PROBLEMS

Employers who misclassify their employees as exempt when they should be hourly open themselves up to liability under both state and federal law.  For Massachusetts employers, this means automatic treble damages, plus attorneys’ fees for all violations.  One of the greatest difficulties we face when litigating wage and hour misclassification cases is that employers do not monitor the hours of the employees they consider salaried.  Therefore, when the employee brings a lawsuit claiming they are misclassified, they invariably claim to have worked more hours than the employer believes they have, thus inflating their potential recovery in the lawsuit.

Please do not hesitate to contact us if you have any questions about your obligations under the new regulations or strategies for reducing the impact of these changes on your business.  We are also happy to work with our clients to evaluate whether employees are properly classified as exempt based on their job duties.  For many clients, we regularly perform audits on this issue, reviewing job classifications and job descriptions/duties.

[1] Under current regulations, lawyers, doctors, outside sales people, and teachers are exempt from the salary basis test.  We do not anticipate this changing.