Employers Should Review Their Pay Practices for the New Year

The beginning of the year is a good time for employers to audit their pay practices for compliance with federal, state and local wage and hour laws. This year, employers should pay particular attention to minimum wage changes, higher salary requirements for exempt workers and COVID-19-related paid leave.

Gina Merrill, an attorney with King & Spalding in New York City, said employers can benefit from conducting an annual review of pay practices. "Think about your pay practices as a [Department of Labor] investigator would."

She suggested that employers invest in training for their managers to create a culture of compliance.

"Where appropriate, employers may need to raise salaries for exempt employees or reclassify them as nonexempt," said Saima Sheikh, an attorney with BakerHostetler in New York City. "Given the current labor market, employers should also pay close attention to how much their competitors are offering to pay employees."

Here are some wage and hour areas employers should check for compliance:

Minimum Wage Changes

Although the federal minimum wage has been $7.25 for years, 29 states and Washington, D.C., have higher rates, and some localities require employers to pay more than the respective state.

Many state and local wage rates have been increasing in phases each year to ultimately reach $15 an hour, and some have already reached or surpassed that rate.

Twenty-five states have scheduled a minimum wage increase for some time during 2022, according to the National Conference of State Legislatures.

Be aware that changes may have taken effect on Dec. 31 or Jan. 1, even if they were enacted or passed months or years earlier, noted Robert Whitman, an attorney with Seyfarth in New York City. For example, New York's rates changed on Dec. 31, while California's new statewide rates took effect on Jan. 1.

Some changes will occur later in the year. Connecticut's minimum wage will increase to $14 on July 1, and Florida's will rise to $11 on Sept. 30. Some cities in California also have midyear changes scheduled.

Additionally, rates may vary based on geographic location, employer size or industry, "so be sure to check state and local laws where you operate to ensure that you're following the applicable minimum wage," Whitman said.

Sheikh noted that increases at the state and local level are starting to plateau at about $15 an hour.

Should employers expect a nationwide wage hike?

"On the federal level, increasing the minimum wage is certainly a goal of the Biden administration," observed Charles McDonald, an attorney with Ogletree Deakins in Greenville, S.C. "There are several bills pending that include an increase to the federal minimum wage, but we don't expect to see any movement until closer to the 2022 elections."

Congress is considering the Raise the Wage Act, which would increase the federal pay floor to $15 an hour by 2025. Although the federal rate remains $7.25 for now, the Department of Labor recently issued new minimum wage rates for employees who perform work in connection with federal contracts. For existing contracts, the rate rose to $11.25 per hour on Jan. 1. However, for new, renewed and extended contracts, the minimum hourly rate will be $15 starting Jan. 30.

Merrill noted that the changes for federal contractors may "reflect the general enthusiasm" of the Biden administration to raise the minimum wage to $15 for all workers.

[SHRM members-only HR Q&A: What are the federal, state and local minimum wage rates?]

Exempt Salary Threshold

The federal Fair Labor Standards Act (FLSA) requires most businesses to pay employees 1 1/2 times their regular rate of pay for all hours worked beyond 40 in a workweek unless they fall under an exemption. The most commonly used exemptions are for administrative, executive and professional jobs, which are collectively called white-collar exemptions.

To qualify for the white-collar exemptions, employees must perform certain duties, be paid on a salary basis and meet a minimum salary threshold. Currently, the FLSA's salary threshold is $35,568, but some states have a higher cutoff for exempt workers.

"Generally speaking, increased minimum wage rates tend to go hand in hand with increased minimum salary requirements for exempt employees," Sheikh explained.

In California, for example, the weekly salary threshold for the white-collar exemptions is calculated by doubling the state minimum wage and multiplying by 40 hours. The exempt salary thresholds in Alaska and Maine are also tied to the state minimum wage, although Alaska's minimum wage is not scheduled to change for 2022.

Other states—including Colorado, New York and Washington—have exempt salary rules that are separate from the minimum wage and will rise for 2022. 

"We can expect to see more states proposing increased salary cutoffs in 2022 as a result of the tightening labor market," Sheikh predicted.

Merrill said states to watch include Illinois, Massachusetts and Vermont.

McDonald noted that the current number of states that have a higher minimum salary threshold than the federal level is still small. 

"We expect to see some increases in the minimum salary threshold in some states, but these increases are likely to move at a much slower rate than the hourly minimum wages for nonexempt employees," he said.

Pandemic-Related Rules

"While the COVID-19 pandemic hasn't caused federal and state minimum wage rates to rise, both the pandemic and rising wage rates are adding pressure on employers to increase wage rates to address staffing shortages and attract and retain strong candidates," Sheikh said.

Merrill also noted that many employers are raising wages in response to labor shortages, "which cuts both ways in terms of what state legislatures might do," she said. Opponents of raising minimum wages might argue that the market is doing its job, while supporters might say that the pandemic has emphasized the importance of paying a living wage.

McDonald said the pandemic has had more of an impact on state and local leave laws, such as expanded paid-sick-leave laws and covered reasons employees can take leave.

For example, the Massachusetts Emergency COVID-19 Paid Sick Leave Law was extended through April 2022.

Although California's statewide COVID-19 supplemental paid-sick-leave law expired, Benjamin Ebbink, an attorney with Fisher Phillips in Sacramento, Calif., said employers could see a renewed push in the state Legislature to revive the benefit as the coronavirus pandemic continues.