The Fair Labor Standards Act (FLSA) determine which employees are exempt (salaried) from overtime and which employees are non-exempt from overtime (hourly). The DOL has completed its rulemaking process, and the final regulations will be published in the Federal Register on May 23, 2016.
The FLSA was originally enacted in 1938, at the height of the Depression. This federal law establishes the national minimum wage, overtime pay eligibility, recordkeeping, and child labor standards. The Department of Labor (DOL) administers the FLSA.
As we’ll see, the FLSA acts as a “floor” for minimum requirements in these areas. Many states and municipalities have minimum wage, overtime pay eligibility, and meal/rest break laws that exceed the federal standards.
Administrative agencies like the DOL don’t need congressional approval to make changes to their rules. Instead, they publish proposed rules, seek public comment, and then publish final rules.
The DOL is making these changes to get around congressional gridlock that’s prevented a minimum wage increase. Without a minimum wage increase, wages have stagnated for the last 10 years. The DOL estimates that 4.2 million Americans will either become eligible for overtime or will receive a raise to meet the new salary thresholds.
New Rules are Effective December 1, 2016
Salary Thresholds and Adjustments
The current salary test is $455/week, or $23,660/year. The new regulations will increase this to $913/week or $47,476/year. Note that this is higher than some state exemption thresholds (NY: $35,100, CA: $41,600). These limits will be updated every three years beginning in 2020 to maintain the level at the 40th percentile of full-time salaried workers in the lowest-wage Census region (which is currently the South). The DOL estimates that the salary threshold will be $51,168 when it is initially adjusted in 2020. This is significant, since for the first time in history the salary level will occur automatically every three years, and won't require additional rulemaking. For employers, this means that the government won't take into account changing economic conditions, specific impact on certain industries, or regional differences. It also foregoes the public's input on rulemaking.
No Changes to the Duties Test
The regulations don’t specify changes to the “duties” test, which is a win for employers. Past commentary made us wonder if the DOL would start to follow the California test. In California, if an employee spends more than 50% of their time doing non-exempt work, they are considered non-exempt. This is why most California Assistant Managers in the retail and restaurant industry are already classified as non-exempt or are classified as salaried + overtime.
Highly Compensated Employee Exemption Changes
The current threshold for highly compensated employees is $100,000. These employees satisfy a more relaxed duties test to qualify for exempt status. Unlike the standard salary threshold, this salary level is based on national data for full-time workers and is set at the 90th percentile. On December 1, 2016, the new salary level will be $134,004.
Nondiscretionary Bonuses, Commissions, and Incentive Pay Count
The current regulations do not permit employers to use commissions, nondiscretionary bonuses, or other incentive payments to satisfy the salary threshold. The new regulations permit employers to use 10% of the salary threshold in the form of incentive pay, providing it is paid at least quarterly. The Final Rule also contains a catch-up provision in the event an employee misses a bonus or commission on a quarterly basis. In this case, the employer can preserve the exemption by making a catch-up payment.
Preparing For the Changes
Here are a few items that will help you prepare for these changes:
- Review your current job descriptions, and make sure they realistically state the job duties. Update them accordingly to make sure that your employees are properly classified.
- Determine whether/how to keep current salaried employees exempt from overtime.
- Design alternative FLSA compliant pay plans if you need to convert employees to non-exempt status. For example, utilize salaried + overtime classifications if possible.
Staffing Model Implications
Given the higher salary threshold and the changes to the duties test, it’s likely that field Assistant Managers, Restaurant Managers, and many corporate office employees will not retain the overtime exemption. These changes will require companies to become more creative with their staffing and scheduling. Some possibilities include:
- Transitioning to a part-time field management structure. This obviously creates more complex management requirements, but it’s also an opportunity to give Millennials the flexibility they crave and enhance your communication processes.
- Increasing General/Restaurant Manager’s scope of duty and salary to encompass several outlets instead of just one.
- Making sure you’re fully staffed with hourly employees. Remember, if you’re understaffed your managers are likely work that falls into non-exempt duties.
- Carefully managing scheduling at both the corporate office and field locations to avoid overtime costs.
- Consider implications to your bonus plans. If a bonus component is based on overtime management, you may be forcing your managers to perform non-exempt work, especially if they’re understaffed.
- Don’t forget that the DOL is also reviewing independent contractor statuses, so make sure you factor delivery people, IT team members, and contract recruiters into your 2017 labor budget.
Once the new regulations are effective, you should remember that any payroll deductions that result in an existing employee's salary to fall below the federal minimum wage will also make you subject to a penalty, and potentially change the status for that employee. Employers should make sure they have pre-acknowledged payroll agreements for all of their employees to make these deductions. Also, be careful about any deductions taken from final paychecks. You don't want a disgruntled ex-employee to call the DOL or your state agency charged with handling wage and hour audits.
The FLSA is a very complex law, so don't go it alone. Jackson Lewis provided an excellent blog about the final rules, which we relied on for our summary in this blog.
This change will require us to implement smart strategies and innovate. Companies that raise the bar on creative staffing and scheduling will succeed. Just remember: the FLSA is a very complex law, so don’t go at it alone.