Big Changes Ahead: Are You Prepared for the Proposed FLSA Regulations?
In an article in the New York Times in 2014, President Obama declared that “Americans have spent too long working more and getting less in return.” The notion of fair pay for fair work is something that resonates among those tirelessly pursuing career goals to support their families and achieve that level of self-actualization that Abraham Maslow identified as our highest motivational need. Since 1938, the Fair Labor Standards Act (FLSA) has been the main federal law that protects employees by regulating the pay practices of their employers as it pertains to equal pay, minimum wage, child labor, and classification of exempt vs. nonexempt employment status.
In order to accommodate the ever-changing needs of our workforce, regulations have been proposed that would significantly impact the white collar exemptions from overtime. Ultimately, when the proposed changes go into effect, the provisions will not only help employees to earn more money, but they may make it more difficult for businesses to do business.
Under the current state of the regulations, employers are required to define the pay status of all positions within an organization as either “exempt” or “nonexempt.” An employee is exempt from receiving overtime if they satisfy all of the requirements of a three-pronged test:
- The employee is salaried with only allowable deductions;
- The employee meets an annual salary threshold of $23,660 (or an hourly rate of $27.63 for computer professionals); and
- The employee performs duties that involve the skills outlined in the white collar exemption definitions.
According to 29 C.F.R. Part 541 of the FLSA, there are six white collar exemptions:
- Executive – Primary duty is managing the organization or a business unit and supervising two or more full-time employees.
- Administrative – Primary duty is to perform work directly related to management or general business operations.
- Learned Professional – Use of advanced knowledge for work that requires constant use of discretion or judgment.
- Creative Professional – Primary duty requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
- Computer – Jobs including and similar to a computer systems analyst, programmer, or software engineer.
- Outside Sales – Primary duty must be making sales or obtaining orders or contracts for services, or for the use of facilities for which a consideration will be paid by the client or customer.
Under the proposed regulations, the three-pronged test will still be the determination of whether or not an employee is exempt from overtime provisions, but changes will be made to the salary threshold and, potentially, to the executive, administrative, and professional exemption definitions. Since the proposed regulations have been released for public commentary, questions have been asked regarding the exemption definitions; however, it is unclear if the duties test will have much variance from the current state of the regulations. What we do anticipate is that the salary threshold will increase from $23,660 to $50,440 for the executive, administrative, and professional exemptions, and the threshold for highly compensated individuals will increase from $100,000 to $122,148.
The implications of the increase in the salary threshold requirement will result in those exempt employees in your organization currently earning between $23,660 and $50,440 changing to a nonexempt status, making them eligible to receive overtime for hours worked over 40 in a standard workweek. If these individuals often work more than 40 hours in a standard workweek, your overtime expenses can quickly spiral out of control if a plan is not put in place to address this issue.
Even though the regulations have not been finalized, we are anticipating a finalization in July 2016. According to the U.S. Solicitor of Labor, M. Patricia Smith, not only will we see finalization in July 2016, but the revisions will take effect 60 days after publication. So, employers must prepare now.
A first step that all employers should do is run a payroll report for current salaries of all employees. Classify your employees as those that currently do not meet the annual salary threshold (i.e., earn less than $23,660 annually), those between the current and proposed salary threshold (i.e., earn between $23,660 and $50,440), and those over the proposed salary threshold (i.e., earn more than $50,440). You will then be able to determine the impact of the shift from currently exempt individuals to nonexempt by looking at the population of employees earning between $23,660 and $50,440. Depending upon the outcome of this analysis, you may want to consider these possible changes:
- Preserve existing exemptions by increasing the salaries of those earning between $23,660 and $50,440 annually to meet the proposed salary threshold, assuming there are no significant changes to the duties test.
- Allow those earning between $23,660 and $50,440 to switch to nonexempt status and pay them overtime for hours worked about 40 in a standard workweek.
- Allow those earning between $23,660 and $50,440 to switch to a nonexempt status and pay them overtime, but regulate overtime worked.