In response to public concern that wages at the low end of the pay scale were slow to rise, particularly for store managers and assistant store managers, the United States Department of Labor (DOL) updated the Fair Labor Standards Act (FLSA) regulations defining which white collar workers must be paid overtime pay.
The DOL estimates that more than 4 million employees nationwide who are not currently paid overtime will now have to be paid overtime, and the majority of those will be employees of retail stores and restaurants.
Indeed, when the DOL announced that new rules will be issued for the first time since 2004, it declared that “[f]ailure to update the overtime regulations has left an exception to overtime eligibility originally meant for highly-compensated executive, administrative, and professional employees now applying to workers earning as little as $23,660 a year. For example, a convenience store manager, fast food assistant manager, or some office workers may be expected to work 50 or 60 hours a week or more, making less than the poverty level for a family of four, and not receive a dime of overtime pay.”
The regulations take effect on December 1, 2016 and it is critical that employers immediately develop a plan to comply in order to avoid very costly litigation by improperly paid employees, or an investigation by the DOL. FLSA violations, such as failure to pay overtime pay, usually results in double damages (meaning that the employee is entitled to two times the amount of unpaid overtime), as well as recovery for the employees’ costs and attorneys’ fees. Employees may be receive an additional amount if the violation is willful.
The new rules
After December 1, 2016, no employee can be classified as exempt under the administrative, executive or professional exemptions (and therefore not receive overtime pay) unless he or she earns at least $47,476 annually, or $913 per week. Employees who are currently exempt under the “highly compensated employee” exemption will have to earn at least $134,004 annually, or $2,577 per week to maintain this exemption. These minimum salary levels will automatically increase every three years.
If employees receive incentive compensation, nondiscretionary bonuses, or commissions, which are paid quarterly or more frequently, employers are permitted use such payments to satisfy up to 10% of the new minimum salary threshold.
At the end of each quarter (13 weeks), if the employer determines that the employee’s salary plus bonus, incentive and/or commission payments did not bring the employee’s weekly compensation to $913, it may make a one-time payment to make up the difference. Consequently, an employee who earns a salary of $825 per week, for example, plus commissions in an amount equal to at least $88 per week, will meet the minimum salary requirement. If, at the end of the quarter, it turns out that she earned only $50 per week in commissions, the employer must make a payment of $494 (13 weeks times the $38 weekly shortfall) in order to keep the employee exempt.
Significantly, the regulations made no changes to any of the duties tests. But to be exempt, employees still must satisfy the applicable duties test. As employers analyze their workforces, it is an ideal time to re-visit whether the employees also satisfy the duties tests. If an employer determines that an employee is currently classified as exempt, but whether or not that employee satisfies the duties test is questionable, a change can be made now without necessarily tipping off the employee that he or she may have been reclassified for some time. Employers all over the nation will be making changes and employees will surely hear about them.
Employers should analyze their workforces, first determining which employees are currently classified as exempt and earn less than the minimum salary (taking bonuses, commissions, incentive payments and premiums or “perks” into consideration as well).
Next, employers should ascertain the average number of hours those employees work. If they regularly work less than 40 hours per week, changing their classification to non-exempt and not raising their salaries may be a perfectly viable option. If, however, they do generally work more than 40 hours per week, assuming they also satisfy the duties test, the employer must raise the salary in order to maintain the exemption.
Only the “white collar” exemptions must meet the new minimum salary threshold. Accordingly, other exemptions which employers may not have previously considered may be an option. One such example is the “retail sales” exemption.
Compliance will not put you out of business
Employers can devise lawful ways to keep their labor costs relatively static while complying with the new regulations. One example is implementing a no overtime rule for employees who will now be non-exempt because they do not earn the minimum salary level, and hire additional part-time or full-time staff to work the extra hours.
Another example is to reduce the annual salary of the non-exempt employee and pay overtime (essentially shifting the mix but keeping average annual earnings static). Alternatively, employers may be able to take advantage a fluctuating work week pay method, which allows employers to pay overtime at one-half, rather than one and one-half times the “regular rate.”
An additional option is eliminating certain pay perks which are not required by the FLSA, such as holiday, weekend or night differentials.
Employers should consult with professionals to develop a strategy for compliance, conducting a privileged audit of the workforce, implementation of changes, communication of changes to employees and training managers.
Communication is critical as employees whose status may be changed from exempt to non-exempt may view the change as some sort of demotion. Equally significant is putting in place a reliable system to record all hours worked by newly non-exempt employees.
Randi B. May ([email protected]) is a partner at Hoguet Newman Regal & Kenney LLP, a commercial litigation law firm in New York City. May focuses on employment law, representing both employee and employer clients in all aspects of the employment relationship. In addition to litigation, her practice includes counseling and litigation avoidance.