Overtime Rule Issued; Salary Level to Increase Every Three Years

Exempt salary doubled under new Fair Labor Standards Act threshold

By Allen Smith, J.D. May 18, 2016
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The Department of Labor issued the long-anticipated final overtime rule May 18 and included an exempt employee threshold of $47,476—less than the proposed rule’s $50,440 but slightly more than double the old threshold of $23,660. 

The impact of the increase will escalate in coming years; the rule included a hike every three years in the minimum salary for exempt employees. The automatic increase will be based on the 40th percentile of the weekly earnings of full-time salaried workers in the lowest-wage Census region, the South. Employers must comply with the new rule by Dec. 1, 2016—a much longer time to comply than the minimum 60 days required of final rules.

Automatic Increase

An increase in the minimum salary could lead to a “death spiral” for the white-collar exemptions, said Lee Schreter, an attorney with Littler in Atlanta and chairperson of the firm’s board. The exempt salary threshold suddenly could be north of $75,000 in several years, she said.

FLSA Overtime Rule Compliance

For more overtime compliance news, tips and tools, check out the SHRM resources provided below:

· FLSA Overtime Rule Resources Guide
· Compliance Checklist · Infographic

With the increase, employers every three years will have to monitor the minimum acceptable salary level for exempt classification, identify employees impacted by a new minimum salary requirement, and assess whether to reclassify the affected employees or restructure jobs, noted Alfred Robinson, an attorney with Ogletree Deakins in Washington, D.C., and former administrator of the Department of Labor’s Wage and Hour Division.

Depending on the timing of the increases, employers may need to restructure their review/compensation cycle to more fully align with the regulatory scheme and allow them to understand the required salary amounts at the same time they are determining merit raises and bonuses, said Alexander Passantino, an attorney with Seyfarth Shaw in Washington, D.C., and former acting administrator of the Wage and Hour Division. In addition, employers may look three years out and determine whether the continued salary increases are sustainable or whether the position should just be reclassified at this time.

$47,476 Threshold

Raising the salary level to $47,476 results in an increase of more than 100 percent, “and it will still impact millions of employees and be a huge burden for some industries, small businesses, nonprofits and some regions,” said Robert Boonin, an attorney with Dykema in Detroit and Ann Arbor, Mich., and an immediate past chair of the Wage and Hour Defense Institute, a network of wage and hour lawyers.

The final rule “is perhaps the most significant workplace development we’ve seen in our professional lifetimes,” he added. “It’s a game changer, and not necessarily a good one.”

Tammy McCutchen, an attorney with Littler in Washington, D.C., said the new exempt salary level is too high, noting that it exceeds New York’s exempt threshold of $35,100 and California’s exempt threshold of $41,600.

The new salary threshold “will definitely have an impact on small businesses, especially in areas of the country that have a lower cost of living,” said Lisa Chui, vice president of finance and HR at Ubiquity Retirement + Savings in San Francisco, a provider of retirement and savings plans for small businesses. “However, it’s a good catalyst to ask the question ‘How can we work smarter?’ vs. 'How can we work longer?’ " 

But a $47,476 threshold “does not eliminate the difficult decisions that employers will face when two employees in the same position earn different salary levels—one above and one below the new mark” when the position’s salary accounts for cost-of-living variances by geography, Passantino observed.

The whole point of overtime isn’t for employees to earn more money, but “rather to make it so expensive for employers to have people work long hours that employers will instead elect to spread the work around to more employees,” said Paul DeCamp, an attorney with Jackson Lewis in Reston, Va., and former administrator of the Wage and Hour Division. “It is no coincidence that many, if not most, companies have long had a rule that nonexempt employees are not to work overtime without permission from their supervisor or manager, and supervisors and managers are usually under pressure not to have the employees they oversee working overtime unless there is a real emergency or an unavoidable spike in the workload.”

He said employees reclassified as nonexempt will, in most instances, see their hours and pay drop. “This result will make a lot of employees very unhappy,” he said. “The administration’s hope that employers will simply eat the cost of the additional overtime expense and in effect give all of these millions of workers a big raise is unrealistic in the extreme.”

However, Allan Bloom, an attorney with Proskauer in New York City, said the rationale for increasing the salary threshold was “simple.” The old minimum salary for exempt workers “was found to be at or near the poverty line for a family of four,” he noted.

And in a May 2 letter to Shaun Donovan, director of the Office of Management and Budget, Sen. Elizabeth Warren, D-Mass., said, “Too often, the voices of workers are buried beneath a flood of comments from lobbyists and lawyers. But the record before your agency demonstrates that American workers are demanding updated overtime rules. Updated overtime rules will give millions of working families a fighting chance to build more financial security for themselves. It’s time for us all to listen to those voices.” Her office also released a report highlighting the benefits of the new overtime rule for workers and their families.

The final rule did not include a change to the duties tests. It did raise the salary threshold level for the highly compensated employees exemption from $100,000 to $134,004, or the 90th percentile of full-time salaried workers nationally. Like the standard salary level for the white-collar exemptions, the highly compensated employees exemption salary level will increase every three years, beginning Jan. 1, 2020.

Action Items

Steps for HR to take to comply with the new rule:

  • Quickly assess the costs of reclassification vs. salary increases. “Determine if it’s feasible to raise salaries to retain the exempt statuses of those on the cusp of the new salary level,” Boonin said. “Reclassify those who fall under the new threshold and determine their pay structure—salaried plus half-time, hourly plus time and one-half, bonus and commission changes.” Nondiscretionary bonuses and commissions are included in the calculation of the exempt salary threshold up to 10 percent of the required salary level, as long as employers pay those amounts on a quarterly or more frequent basis.  
  • Implement and communicate the compliant approach to affected employees and managers. Determine whether communications about the rule will be in one-on-one meetings, small group meetings, large group meetings, memos or a combination of these approaches, Boonin recommended.
  • Train supervisors on managing nonexempt employees, advised James Swartz, an attorney with Polsinelli in Atlanta.
  • Check whether state wage notification laws require a pay period or 30 days’ notice of any change in pay and send out notices about the changes, if required.

Swartz said managers must understand how to:

  • Train nonexempt employees to track and report time.
  • Avoid encouraging work after hours.
  • Manage overtime.

Employee morale should be managed in the event of reclassification or salary compression, he added.

Reclassified employees may view the change as a demotion. Plus, if employers decide to raise the pay of employees in the same position above the new exempt salary threshold, the difference between the pay of top and low performers may be compressed, Schreter explained. And the difference between the pay of those with raised salaries and their bosses may shrink as well, adding more morale problems.

Communications with employees should emphasize that reclassification was a result of changes in the regulations. Employers should note that “any reclassification is not a reflection of the value of an employee’s contributions to the success of the organization and [that] the company will work with employees impacted by reclassification to make a successful and positive transition,” Robinson remarked.

For more on the overtime rule, see the Society for Human Resource Management Overtime Resource Center.

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

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