Proposed Overtime Rule’s Salary Threshold Is Too High

By Allen Smith Sep 8, 2015
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The proposed increase to the salary threshold for exempt employees is too high and will have a significant negative impact on employers and employees, the Society for Human Resource Management (SHRM) wrote in comments to the U.S. Department of Labor (DOL).

The salary level—which would more than double from the current $455 per week to a proposed $970 per week in 2016—will create difficulties particularly for nonprofit organizations, state and local governments, and organizations based in certain regions of the country with lower costs of living and lower incomes, SHRM said.

The DOL has set the new salary threshold at the 40th percentile of earnings for full-time salaried employees, a significant change from the past. The regulatory history reflects Democratic and Republican administrations adjusting the salary level between 10 and 20 percent while taking into consideration industry and regional differences, wrote Mike Aitken, SHRM vice president, government affairs.

Nonexempt Executives

Many CEOs at small nonprofits earn salaries below the proposed salary threshold, Aitken stated, creating the absurd possibility of nonexempt executives.

He noted that the Nonprofit Times reported the average salary for CEOs of small nonprofits to be $59,510. Under the proposed salary level, exempt employees would earn at least $50,440 a year in 2016, an amount that would automatically increase each year. SHRM opposes the automatic increase.

“Many small nonprofit CEOs in the sample likely earned salaries below the proposed salary threshold,” SHRM wrote.

Additionally, a 2014 survey of compensation at nonprofits conducted by the American Society of Association Executives found annual compensation of some CEOs at nonprofits to be as low as $37,500—well below $50,440.

Other average salaries for executives at small nonprofits in 2013 were, according to the Nonprofit Times:

  • Chief financial officer—$40,000.
  • Chief operating officer—$41,813.
  • Chief development officer—$56,000.
  • Communications/PR director—$59,600.
  • Chief program officer—$41,970.

Geographic Differences

The proposed rule also failed to sufficiently take into account the differences in wages depending on different costs of living by region, SHRM stated.

CNN Money’s Cost of Living Calculator estimates that:

  • A $55,000 annual salary in Washington, D.C., is comparable to a salary of just over $35,000 in Martinsburg, W.Va.
  • A salary of $75,000 in San Francisco is comparable to a salary of $47,500 in Fresno, Calif.
  • A salary of $60,000 in Trenton, N.J., is comparable to a salary of $46,800 in Rochester, N.Y.

“Yet DOL’s proposal contains no meaningful analysis to determine the impact on jobs in regions with low costs of living,” Aitken wrote. “The department’s proposed salary threshold is one-size-fits-all; there are no regional variations.”

He added, “That would not necessarily be a problem if the department appropriately considered regional variations in selecting the salary threshold, but it did not.”

Negative Consequences

Will employees benefit from the higher salary threshold? Of the 4.6 million employees directly affected by the salary level, only 988,000 work more than 40 hours in a week. That means 3.7 million of the affected employees do not regularly work more than 40 hours in a week.

The result? The majority of affected employees “are likely to experience negative consequences of reclassification, including reduced workplace flexibility, loss of professional status and reduced access to opportunity to gain needed experience,” SHRM said.

“While DOL’s proposal acknowledges that the proposed rule may have some adverse effect on employees, the consequences of reclassification are not considered in any depth,” Aitken wrote in SHRM’s comments. “Of course the department could mitigate the impact of these negative consequences by more appropriately setting the salary threshold so that it serves as a reasonable proxy for those employees unlikely to pass the duties test.”

SHRM noted that it supports DOL’s position to refrain from making any changes to the existing duties test, but expressed concern that the department is considering further restricting the executive exemption. “If overtime regulations are modified to eliminate the ability of employees to perform concurrent duties and maintain their exempt status, many organizations would need to be restricted in ways that diminish the services being provided,” SHRM said.

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

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