Don't panic: The 'new' final DOL minimum salary requirements and exempt status are here

Written on Nov 21, 2016

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*Since the November/December 2016 issue went to print, a federal district court imposed a preliminary injunction against Department of Labor overtime rules that were scheduled to go into effect Dec. 1. Read the rest of the updated story here.*

 By Scott Warrick, JD, MLHR, CEQC, SCP


Under the Fair Labor Standards Act (FLSA) of 1938, Congress gave employers the ability to classify certain employees “exempt” from overtime regulation.

As a result, employers can require their exempt employees to work as many hours in a week as they want without paying these employees overtime wages, since such employees are exempt from the FLSA’s overtime requirements.

However, an employer cannot make just any employee it wants exempt from overtime. To qualify for exempt status under any one of these three classifications, employers must meet three tests, which are:
1. The Minimum Salary Test, which has traditionally been set at the 20th percentile of weekly earnings for exempt salaried workers,
2. The Duties Test, which includes one for bona fide executive, administrative and professional
employees, and
3. The Salary Test, which means employees paid on salary basis must be paid for their “services” and not for the number of hours it takes the employee to complete
their work.

The Department of Labor (DOL) says for an employee to be classified as exempt under Wage and Hour’s primary exemptions, which are the Executive, Administrative, Learned and Professional Exemptions, that employee must be paid on a salary basis (as defined in the regulations) at a rate of at least $455 per week ($23,660 per year).

However, the Final Regulations, which will be effective Dec. 1, 2016, make the following changes to the current regulations:
1. Set the standard salary level at the 40th percentile of weekly earnings for exempt salaried workers, which equals $913 per week, or $47,476 annually.
2. Under the Final Regulations, up to 10% of standard salary level can come from non-discretionary bonuses, incentive payments, and commissions, paid at
least quarterly.
3. The threshold will be updated every three years instead of annually, rising to $51,000 on Jan. 1, 2020.
4. The total annual compensation requirement needed to exempt highly compensated employees (HCEs) is currently set at $100,000.00. However, as of Dec. 1, 2016, the Final Regulation raise this minimum salary to the annualized value of the 90th percentile of weekly earnings of salaried exempt workers, which is equal to $134,004 annually and at least $913.00 per week in weekly salary.

Key Considerations

Cost of Increasing Wages
First, employers have to decide which salaried exempt employees currently making close to $47,476.00 are going to get a raise. Obviously, if someone is making $45,000.00 or $46,000.00 a year, giving the employee a raise to the new minimum salary is a “no brainer.”

One huge concern for employers over this change to the minimum salary is the loss of labor. Most salaried exempt employees work at least 50 hours per week, which is 10 hours of overtime each week. Across a 50-week year, that is an extra 500 hours in “free” labor the employer will be losing per salaried exempt employee.

However, for those salaried exempt employees who make far less than $47,476.00 a year, the most obvious solution is to make that employee an hourly nonexempt employee, which opens up a host of other issues for employers.

Tracking Hours
Hourly nonexempt employees must track their hours. They must track the time they start and end work each day, the time they take for unpaid lunch breaks and so on.
Now, employers have to ramp up the learning curve and train its salaried exempt employees, who will soon become hourly nonexempt employees, how to complete their time sheets accurately.

Off Duty Duties
Salaried exempt employees typically come in to work early … and then stay late. They will take their work home, often on their laptops. Employers often call their salaried exempt employees at home after hours and discuss matters related to the organization.
However, if salaried exempt employees become hourly nonexempt employees, then all of this stops. Hourly nonexempt employees must be paid for all of their time. This, as well as recording their hours, will be a huge cultural change for most salaried exempt employees.

Employee Benefits
Sometimes, exempt employees receive additional benefits, such as additional vacation time, because they are classified as being “exempt.” Employers will have to reassess if those employees who were previously classified as exempt but are now nonexempt will continue to receive those same
additional benefits.

Fixed salary for fluctuating workweek agreement
Buried in the regulations (Section 29 CFR 778.114), the DOL allows employers to pay nonexempt employees a salary pursuant to a written agreement that these employees will receive their fixed salary amount as straight time pay for whatever hours they work in a workweek, when those hours the employee works often “fluctuate” from week to week. This agreement must be in writing and state the fixed weekly salary pay these employees for all of their straight time wages for the hours they work each workweek.

Since the employee’s fixed weekly salary in the agreement is intended to compensate the employee at straight time rates for hours worked in the workweek, the regular hourly rate of the employee will vary. The employee’s hourly rate is determined by dividing the number of hours worked in the workweek into the employee’s weekly salary to determine the employee’s hourly rate for the week.

So, the more hours a nonexempt salary employee works in a given week, the lower the hourly rate becomes.

In the end, since the nonexempt salaried employee’s straight time wages have already been paid for the week, the employer only owes the employee half-time wages for any hours more than 40 worked in that week.

Of course, the employee’s hourly wage for that week must be greater than the FLSA’s minimum hourly wage rate (as well as the state’s minimum hourly wage rate).
However, this method of paying employees is called the “fluctuating workweek” method for a reason. If an employee always works a fixed 44-hour schedule that never varies from week to week, this method cannot be used. According to the DOL, not only do the employee’s hours have to fluctuate, but they have to fluctuate both above and below 40 hours per week. So, if the employee’s schedule bounces between 41 and 45 hours per week, but they never have a week below 40 hours, this is not the method for you.

 

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Will these regulations take effect?

On Sept. 28, 2016, the House of Representatives voted 246 to 177 to postpone the new regulations for six months. The Senate will need to vote on this bill when it reconvenes in November.

However, even if the Senate passes the bill, it will go to President’s Obama’s desk … where it will be vetoed. As of right now, Congress simply does not have the votes to override a Presidential veto. So the chances of Congress delaying the regulation changes are not good.

Also, a coalition of 21 states have filed a lawsuit against the DOL trying to block the
implementation of this new regulation. The Eastern Texas district where the lawsuit was filed is known as a “rocket docket” court where cases move along quickly.

However, this coalition must prove its case to the federal district court judge. Even if this coalition wins, the DOL will undoubtedly appeal to the Fifth Circuit Court of Appeals. Even if the DOL loses at the circuit court level, the DOL will certainly go to the U.S. Supreme Court level, if it accepts the case.

While the federal court might put a stay on the Dec. 1, 2016 effective date as a result of these proceedings, the issue will not go away for a long time.

Therefore, I am recommending to my clients they prepare for the Dec. 1, 2016 effective date and wait to see what happens next.

OSCPA’s position on the proposed DOL overtime rules
Although the Department of Labor new overtime regulations has become a popular topic in the latter half of 2016, it’s an issue The Ohio Society of CPAs has been advocating on for much longer. OSCPA sent a letter to the DOL during the comment period in 2015 and Society representatives met with members of the Ohio Congressional delegation earlier this year to discuss this issue.

OSCPA, along with 17 other state CPA societies, has joined forces with the Partnership to Protect Workplace Opportunity to oppose the DOL efforts. This national coalition of employer groups asked Congress to consider the significant, negative impact the proposed rules would have on both employers and employees if implemented.

“We are disappointed by the Labor Department’s 100% increase to the salary threshold for overtime eligibility,” said OSCPA President & CEO Scott Wiley, CAE. “This rule will impose serious hardships on public and private sector employers and employees, which will have damaging consequences for the communities they serve. We urge Congress to support legislation

Notice: Legal Advice Disclaimer
The purpose of these materials is not to act as legal advice but is intended to provide human resource professionals and their managers with a general overview of some of the more important employment and labor laws affecting their departments. The facts of each instance vary to the point that such a brief overview could not possibly be used in place of the advice of legal counsel.

Also, every situation tends to be factually different depending on the circumstances involved, which requires a specific application
of the law.

Additionally, employment and labor laws are in a constant state of change by way of either court decisions or the legislature.

Therefore, whenever such issues arise, the advice of an attorney should be sought.
Scott Warrick is an employment attorney and HR professional who combines the areas of law and human resources to assist organizations in “Solving Employee Problems Before They Happen.” He can be reached at scott@scottwarrick.com or through his website at www.scottwarrick.com.

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