How will recent changes to federal wage and hour law affect your business?

The cost of doing business in the United States will likely increase significantly due to recent changes in the federal law the governs employee wages.  The revisions by the U.S. Department of Labor (DOL) to the Fair Labor Standards Act (FLSA) will affect virtually every employer and approximately 4.2 million American workers.

More specifically, the DOL increased the minimum salary level—from $455 per week ($23,660 per year) to $913 per week ($47,476 per year)—that certain employees must earn in order to be considered “exempt” from the FLSA’s overtime requirements.  While there are a variety of exemptions from overtime, the revised regulations only apply to those employees who work in a “bona fide administrative, executive, or professional capacity” (often referred to as the “white collar exemptions.”)

Employers, including not-for-profit organizations and small businesses, must decide whether to increase those employees’ annual salaries or reclassify them as non-exempt, which means they must be paid overtime when they work more than 40 hours a week).

The Basic Rules

Under the current FLSA regulations, the white collar exemptions apply to those employees whose “primary” job duty satisfies one of three specifically-enumerated “duties tests” and who earn a predetermined and fixed salary between $455 and $1923 per week ($23,660 and $99,999 per year).  Employers may not rely on an employee’s bonuses or incentive payments to meet the $455 weekly threshold.

The existing regulations also provide an exemption for highly compensated employees (HCEs)—those whose total compensation is more than $1923 per week, which must include a salary of at least $455 per week.  Instead of the “primary” duty test, however, HCEs must “customarily and regularly” perform one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.

Revising the Regulations

The revised regulations have been in the works since 2014, when President Obama directed the DOL “to propose revisions to modernize and streamline the existing overtime regulations…consistent with the intent of the [FLSA].”  The DOL published a Notice of Proposed Rulemaking in July 2015, inviting interested parties to submit written comments.

In its Notice, the DOL recommended the following: (1) an increase in the minimum salary level for the exemption, which for 2016, would have resulted in a new level of about $970 a week, or $50,440 a year; (2) an increase in the minimum total compensation to qualify as an HCE, which for 2016, would have been $122,148; and (3) the creation of a mechanism for automatically updating the salary and total compensation levels every year.

The DOL did not propose any changes to the duties tests or to the regulations’ prohibition on the use of non-discretionary bonuses and incentive payments to satisfy the minimum salary requirement, but sought comment on both of those issues.

The DOL’s proposal resulted in over 270,000 comments. Commentators were primarily concerned about the steep increase proposed by the DOL and the lack of exception for non-profit organizations and small businesses.

The Final Regulations

The final regulations, announced this past May, focus on updating the salary and compensation levels needed for the white-collar exemptions.  Specifically, the regulations:

  • Set the minimum standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, currently the South, which as of 2016 is $913 per week (or $47,476 annually);
  • Set the total annual compensation requirement for HCEs to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which currently is $134,004;
  • Establish a mechanism for automatically updating the salary and compensation levels every three years starting in 2020 to maintain the levels at the above percentiles; and
  • Allow employers to use bonuses and incentive payments (including commissions) to satisfy up to ten percent of the salary level, as long the bonuses and commissions are paid on a quarterly or more frequent basis.

The revised regulations do not change any of the job duties requirements needed to qualify for the exemption.  Despite the concerns of several commentators, the regulations do not make exceptions for not-for-profit organizations or small businesses. 

What this Means for All Employers (Including Those in California)

Employees who do not meet the new salary requirements on December 1, 2016, will no longer qualify for the executive, administrative, or professional exemptions. Employers will have to decide what to do regarding those employees’ annual salaries and their exempt status.

For states such as California, which almost always has employment laws that are more favorable to employees than their federal corollaries (generally speaking, employers must comply with whichever law is more employee-friendly), the changes to the FLSA will actually mean something.  California’s minimum salary for the white collar exemptions is equal to two times the state’s minimum wage (currently, 2 x 40 hours per week x 52 weeks per year x $10.00 per hour = $41,600), and therefore has always exceeded the federal threshold.  As of December 1, 2016, that will no longer be the case.  For example, an employee who earns $45,000 on December 15, 2016, may properly be considered exempt under California law, but would fail to meet the minimum threshold for the federal overtime exemption. As a result, we may see a slight increase in FLSA litigation because of employers who mistakenly believe that compliance with California law is sufficient to satisfy federal law. This somewhat unique circumstance (where federal law is more favorable to employees than California law) will exist until January 2018, when California’s minimum wage increases to $12.00 per hour, making the minimum threshold salary for the state’s white collar exemptions $49,920.

What Should Employers Do?

To avoid these (and similar) wrinkles, employers should make plans now to deal with this significant change to their employees’ compensation.  Most importantly, employers should re-evaluate the classification of any exempt positions that pay less than the new federal threshold, and consider how the increase in salaries (or reclassification of those positions from exempt to nonexempt) will affect everything from budgeting to employee morale.  And, of course, now is as good a time as any to reevaluate whether certain positions meet the duties tests for both the state and federal white collar exemptions.

Let’s consider, for example, a small company’s exempt non-supervisory “controller” who is currently earning a salary of $42,000 and working on average 40-50 hours per week.  On December 1st, the company must decide whether to increase the controller’s annual salary by nearly $5,500 or start paying the employee overtime for all hours worked in excess of 40 each week.  If the company reclassifies the position as nonexempt, how much does the company pay the employee per hour (because presumably the company does not want to cut the employee’s total compensation, but does want to be able to budget expenses accurately)?  And while the company is re-evaluating the employee’s exempt status under the “salary basis test,” should it also reconsider whether the controller meets the “duties test”?  Is the employee actually engaged in higher level policy-making decisions that affect the company’s overall finances or is the employee’s job more limited to data entry?

Employers should consult qualified employment law attorneys to assist them in answering these and other difficult questions in light of the recent changes to the FLSA.

The article entitled “How will recent changes to federal wage and hour law affect your business?” authored by Mark Delgado was published in the 2016 Legal & Accounting Resource Guide published by the North Bay Business Journal. (Mark retired from the practice of law).