‘Death Spiral’ for Exempt Employees Predicted

By Allen Smith Jul 8, 2015
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The use of white-collar exemptions will become increasingly difficult with each passing year if the Department of Labor’s (DOL’s) proposed cutoff at the 40th percentile of earnings for full-time salaried workers is in the final overtime rule, according to Paul DeCamp, an attorney with Jackson Lewis in Reston, Va., and former administrator with the department’s Wage and Hour Division.

“The result when it comes to using a percentage threshold is a death spiral for exempt status,” he said. The 40th percentile is estimated to be $970 a week or $50,440 annually for 2016.

“If one keeps cutting out the bottom 40 percent—or whatever number is selected—of salaried workers, pretty soon there are no more salaried workers left,” DeCamp said. “Increasingly, salaried workers are exempt workers, as salaried nonexempt status has become increasingly unworkable for employers. So each annual salary adjustment based on a percentage simply has the net result of rendering more exempt employees nonexempt.”

The DOL also is considering using the Consumer Price Index for All Urban Consumers, rather than a percentage. DeCamp said the index “also has its drawbacks, though they are not as severe as the percentile concept.”

But the bottom line, he said, is that “the current political leadership at the Department of Labor hates exempt status and wants to make it as difficult as possible for employers to classify employees as exempt. There is no other plausible explanation for what they have proposed to do in the notice of proposed rulemaking. It is an ideological position fueled by pro-union passions and absolute disdain for the business community. For employers who cannot afford to pay exempt employees $50,000-plus per year, the only options are to get ready to convert exempt employees to nonexempt, most likely hourly, or else to try to preserve exempt status by participating in the political process.”

DeCamp added, “If the rule goes into effect and it incorporates the 40th-percentile concept, my assumption is that the department will issue an annual update specifying the salary threshold in dollar terms, rather than expecting millions of employers to undertake their own economic research each year.”

Annual Increase

The 40th-percentile method means that employers may be forced to reclassify some employees annually, or adjust their salaries.

“Each year, employers will be confronted with having to evaluate whether to raise the salaries of those individuals who are below the new minimum,” said Lee Schreter, an attorney with and chairman of the board at Littler in Atlanta.

“So instead of bringing certainty to the exemptions, the annual increase will create an annual pot-stirring of employee relations issues. Additionally, the annual changes in the minimum could wreak havoc on employers’ compensation systems and have the unlooked-for adverse impact of flattening compensation structures, constricting performance increases, forcing employers into lock-step increases based on a regulation as opposed to actual performance, and giving companies a possible incentive to send jobs overseas to foreign markets with lower labor costs,” she told SHRM Online.

Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C., and former Wage and Hour Division acting administrator, said, “Curiously, DOL’s proposal does not acknowledge explicitly whether the salary level could go down from one year to the next, depending upon the benchmark used in the final rule and changes in the economy; rather, the proposal uses language calling for automatic updating of the salary levels. This should be clarified to include upward, as well as downward, adjustments to the salary level and annual compensation amount.”

Schreter noted that the current proposal also “indicates that employers will be given only 60 days to comply with annual changes—a plainly insufficient period of time to evaluate the proposed change, make the necessary decisions, and communicate any changes to employees and managers.”

Schreter’s “sincere hope is the DOL will abandon the automatic-increase approach and utilize an approach in which future increases are sought using the long-accepted method of notice and comment. The notice-and-comment process provides employee and employer advocacy groups with a fair and open opportunity to provide the DOL with valuable information before changing the minimum salary requirements.”

But, she said, “employers should plan for some type of annual increase and budget accordingly.”

Unprecedented Salary Level

The salary level of 40 percent is “unprecedented in the 77-year history of the FLSA [Fair Labor Standards Act],” said Tammy McCutchen, an attorney with Littler in Washington, D.C., and administrator of the Wage and Hour Division during the last revision to the white-collar exemption regulations in 2004.

“In 1958, for example, DOL looked to exclude the bottom 10 percent of salary-paid employees; in 2004, we used the bottom 20 percent of salaried employees in the South and retail industry. Even applying inflation to the past minimum salary level (e.g., the long-test levels, not the short-test levels), gets you to a salary level around $35,000 to $40,000.”

“Inflation has historically not been used as the method for updating the salary level,” noted Alexander Passantino, an attorney with Seyfarth Shaw in Washington, D.C., and former Wage and Hour Division acting administrator. “The 40-percent method is also much higher than the previous methods used and, despite the department’s protestations to the contrary, does not adequately address regional and industrial differences: the South, small and start-up businesses, retail and hospitality are the obvious areas where the level will be a problem. We’ve already heard of significant concerns from the not-for-profit and educational sectors as well.”

He recommended that employers “start reviewing positions now to have a sense of what you will need to do in 2016. Employers might also use the opportunity to take some of their questionably exempt positions and convert them to nonexempt as part of the larger review. Auditing classifications will take on increasing importance during this rulemaking process. This has been a major news event with massive media coverage—for a wage and hour issue particularly—and employees are going to start asking more questions about their entitlement to overtime.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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