Increased Salary Level Test for the Fair Labor Standards Act to Take Effect December 1, 2016
November 15, 2016
By Megan J. Crowhurst & J. Kent Pearson, Jr.
Effective December 1, 2016, U.S. Department of Labor rules increase the minimum salary level for Fair Labor Standards Act (FLSA) “white collar” overtime exemptions from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). Up to 10% of that minimum salary may be paid in the form of quarterly non-discretionary commissions or bonuses. This means that white collar employees below the new salary threshold generally will become eligible for overtime payments notwithstanding their duties and salary basis payments. Under the existing FLSA white collar exemptions, employers still may not treat an employee as exempt unless the employee is paid on a salary basis and meets the applicable “duties” test, with some exceptions.
The new minimum salary level impacts all businesses and employees covered by the FLSA regardless of size or industry. To remain in compliance with the FLSA, business owners should audit their payroll records to determine whether any employees currently classified as exempt earn less than the new minimum $47,476 salary. If so, companies should consider these options:
- Reclassify employees and pay overtime. Perhaps the simplest option is to reclassify employees earning less than $47,476 as non-exempt salaried employees. For administrative convenience, employers may elect to convert an employee’s salary into an hourly wage instead of continuing to pay the employee a salary. In either case, however, the employer is required to track all hours worked, and pay overtime for all time worked over 40 hours in a work week. Employers will likely need to address employee concerns that the non-exempt status is less prestigious, that previously-exempt employees have never been responsible for tracking time and attendance, and that employees will have to use paid time off for absences. This option will likely impact the employer’s bottom line significantly if employees in this category work a substantial number of weekly hours over 40.
- Limit overtime. In conjunction with reclassifying employees as non-exempt, employers can take steps to limit the amount of overtime worked by requiring advanced approval to work more than 40 hours per week, but employers must still pay overtime even if the employee violated policy. This may require reassigning workloads or hiring additional employees to handle the work no longer performed in overtime.
- Increase salaries. For employees whose salaries are close to the $47,476 threshold, it may make more financial sense to raise their salary to meet the salary level test. However, this may create an expectation from other employees that they will also receive an increase in pay. Moreover, depending on the extent to which an employer is willing to increase salaries to maintain exempt status, it ultimately may have exempt and non-exempt employees in the same job class based solely on the salary level test.
Although there are efforts in Congress and the courts to delay implementation of the DOL salary rules, the success of those efforts appears unlikely at present. Of course, as a result of the recent presidential election, the new administration may re-examine the rules. In the meantime, employers should assume the rules will go into effect as scheduled, and strategize regarding compliance with them.
All of the options presented above have pros and cons that can impact a company’s bottom line and require careful implementation to avoid liability.
If you have any questions about how this new FLSA regulation may impact your workforce, please contact a Bullard Law attorney.