Small Business Owners Beware! The FLSA is Changing By Philip T. Segura May 18, 2016 While many people were busy debating the need to raise minimum wage to $15 per hour, the Department of Labor (DOL) silently proposed changes to its regulations regarding exempt employees. The final rule, which more than doubles the minimum salary requirement, was released today. Employers will have little time to prepare as the final rule goes into effect this December. The DOL expects that its changes will impact over 4.2 million workers nationwide 370,000 of which are in Texas. Most people are familiar with the basic provisions of the Fair Labor Standards Act (FLSA) employers are required to pay covered employees minimum wage and are also required to pay employees time and a half for their overtime hours. Certain employees, however, are considered exempt from the minimum wage and overtime requirements of the act. These exemptionsare narrowly construed against the employer. The exemptions pertaining to executive, administrative, and professional employees (commonly referred to as the white collar exemptions ) and highly compensated employees (commonly referred to as the HCE exemption) are subject to the rule changes announced today. These changes were announced in response to a Presidential Memorandum issued by President Obama on March 13, 2014, calling for revisions to address outdated rules for exempt employees.on July 6, 2015, the DOL published its
proposed changes to the regulations regarding exempt employees. The final rule was released today May 18, 2016. The Old Rule and the New Rule White Collar Exemptions Under the current white collar exemptions, employees must meet specific tests in order to qualify: (1) the 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; (2) the amount of salary must meet a minimum specified amount; and (3) the employee s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations. The DOL is changing the salary requirement. The minimum salary requirement is currently $455 per week or $23,660 for a full-year worker. The DOL s final rule more than doubles the minimum salary requirement by changing it to $913 1 per week or $47,476 for a full-year worker.this is slightly lower than the original proposed rule, which would have set the minimum salary requirement at $50,440 for a full-year worker. Under the new rule, employers may satisfy up to ten percent of the minimum salary requirement through the payment of nondiscretionary bonuses, incentives, and commissions. The payments, however, must be made quarterly or on a more frequent basis. Employers will also be allowed to make a catch up payment at the 1 The final rule bases the minimum salary requirement on the 40 th percentile of earnings for fulltime salaried employees. 2
end of the quarter if the total pay received does not meet the minimum salary requirement. Highly Compensated Employee Exemption In order to qualify for the HCE exemption, an employee must: (1) have a total annual compensation of at least $100,000; (2) which includes $455 per week paid on either a salary or fee basis; (3) perform at least one of the duties or responsibilities of executive, administrative, or professional employees; and (4) must perform primarily office or non-manual work. Employers may count commissions and nondiscretionary bonuses towards the $100,000 requirement and may make a catch-up payment if the total compensation at the end of the year does not meet $100,000. The DOL is increasing the $100,000 requirement for the HCE exemption to $134,004. The DOL based the new annual compensation limit on the 90 th percentile of earnings for full-time salaried workers. Ongoing Problem The new minimum salary requirement will be an ongoing problem for employers. The DOL has only raised the minimum salary requirement seven times since the white collar exemptions were introduced in 1938. The last change occurred when the DOL enacted updated rules in 2004. Due to the typically long passage of time between rulemaking, the minimum salary requirement would become obsolete without a mechanism for keeping up with the times. Addressing these concerns, the DOL s final rule makes the salary requirement for the EAP and HCE 3
exemptionssubject to regular updates. Beginning January 1, 2020, and every three years thereafter, the DOL plans update the required salary. While an annually updated minimum salary requirement will prevent huge jumps (such as the $455 per week to $913 per week jump the DOL happening now) it will create an ongoing problem for employers trying to comply with the FLSA. Essentially, employers will be required to constantly examine the updated minimum salary to ensure that their payroll policies do not become outdated. Effective Date for New Rule Major rules such as this typically go into effect 60 days after publication. The DOL, however, pushed the effective date of the rules to December 1, 2016. The text of the rule can be found on the Department of Labor website. The rule is set to be officially published in the Federal Register on May 23, 2016. What this Means for Employers Act Now Employers need to take immediate steps to avoid noncompliance with the FLSA before the new rule takes effect. Employers will need to examine how they are paying their exempt employees. Employees formerly exempt under the old rulewill need to be reevaluated to ensure that their status has not changed under the new rule. Employers will need to determine whether to raise salaries for many employees, re-classify them as non-exempt, or pay them time and a half for their overtime hours. 4
Additional Problems Re-classification raises its own problems. For employees being re-classified as non-exempt and paid on an hourly basis, employers will need to ensure that they comply with the overtime requirements of the FLSA. Additionally, these newly nonexempt employees will now be subject to the FLSA s recordkeeping provisions. While the new rule will not convert exempt employees into hourly employees, the rule will require affected employees to be paid time and a half for their overtime hours. Some employers may simply opt to pay their salaried exempt employees time and a half for their overtime hours. Employers seeking to go this route should be wary of the unique rules regarding calculating overtime rates for non-exempt salaried employees. Consequences for Failing to Prepare Employers who fail to take steps to prepare for the upcoming rule changes may be faced with unnecessary lawsuits over misclassifying employees and failing to pay overtime. Employers should keep in mind that, under the FLSA, the employer bears the burden of proof of establishing the applicability of FLSA exemptions. An employee suing for unpaid wages under the FLSA may recover wages for two years (or up to three years for violations found to be willful under the act). Importantly, employees are typically entitled to recover their full unpaid wages plus an additional amount equal to their unpaid wages in the form of liquidated damages.employers should also keep in mind that attorney s fees are mandatory 5
under the FLSA. In other words, an employer sued under the FLSA may be required to pay for their attorney as well as their employee s attorney. The Time to Act is Now Employers should be wary of the new rule for FLSA exemptions. This rule will drastically change the salary requirement for many exempt employees once in effect.as already stated, the failure to take necessary steps to prepare for the changes could result in costly lawsuits for employers. Employers should act immediately to avoid the harsh consequences of failing to comply with the FLSA. If you have questions about addressing these drastic changes to the FLSA, contact Steele Law Group PLLC. Our firm has significant experience with handling FLSA and human resources matters (including annual HR audits), and is ready to help you. 6