Wednesday, May 18, 2016

I scream, you scream, we all scream … for the FLSA’s new salary test

At 3 pm this afternoon, Vice President Joe Biden, Senator Sherrod Brown, and Secretary of Labor Tom Perez will appear at Jeni’s Ice Cream in Columbus, Ohio, to announce the Department of Labor’s new overtime rule.

The rule, as expected, increases the salary level at which one qualifies as an exempt white-collar employee ($913 per week; $47,476 annually), while leaving alone (for now) the duties one also must meet to qualify. It is expected that 4.2 million white-collar workers will now qualify for overtime.

The effective date of the final rule is December 1, 2016, giving employers more than six months to digest the new rules, reclassify workers, and comply with the new salary test.

In advance of today’s announcement, late yesterday the DOL published the Final Rule, along with some guidance for employers. It also published this handy chart, comparing the current regulations, last year’s proposed regulations, and the final regulations.

What does the DOL want you to know about the new rule? It:
  1. Only applies to the administrative, executive, and professional exemptions.
  2. Sets the salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually).
  3. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004).
  4. Establishes a mechanism for automatically updating the salary and compensation levels every three years.
  5. Permits employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level (this is new to the FLSA, and a pleasant surprise for employers).
I will say, while a 50% increase in the salary test is significant, the Final Rule is not nearly as bad for employers as it could have been or was feared.

  • The salary test is based on the lowest-wage Census area (the South);
  • It will update every three years (not ever year, as feared);
  • It left the duties test alone (for now);
  • It providers a much longer than feared six months until effective; and
  • It introduced the inclusions of bonuses and commission into the salary calculation.

Perhaps what is most interesting, however, is the guidance that the DOL chose to publish along with the Final Rules. Much of the criticism lobbed at the DOL over the increased salary test related to the higher salary level’s impact on small businesses, non-profits, higher-education institutions, and governments. Not so coincidentally, take a look at the guides and fact sheets the DOL published alongside the Final Rule:
Employers, you have a little more than six months to get your wage-and-hour houses in order. You need to figure out which of your exempt employees make less than $47,476, and determine what you are going to do with them—switch them to non-exempt or gross-them up to the new salary level.

If you switch them to non-exempt, you will have to deal with the employee-relations issues that arise from tracking (or restricting) overtime and limiting flexibility. If you gross them up to keep them exempt, you will have to deal with the employee-relations issues that arise from salary contraction. Will your manager be happy that she is being paid nearly the same as her assistant manager / supervisee?

There are no easy answers, and you only have until December 1 to figure it out.