Overtime Shake Up: Exempt Employee Fruit Basket Turnover

On December 1, 2016 many work places will change drastically for both the employer and certain exempt employees. That is the day the Department of Labor’s (“DOL’’) new exempt employee regulations go into effect. Under the new rules, the annual salary for certain classes of exempt employees must more than double from $23,660 to $47,476 per year ($916 per week) or businesses will lose the overtime exemption for those employees. Similarly, the compensation for highly paid employees must increase from $100,000 to $134,004 annually. Each of these base salary amounts will automatically adjust every three years thereafter.

The changes address the current administration’s view that for too long managers and supervisors have worked long hours with low pay at compensation levels that do not reflect an opportunity to share in the wealth of the company they are supporting. The new regulations apply to the Fair Labor Standard Act’s white collar exemptions (administrative, executive and professional employees) and the “highly compensated” employees, who currently earn $100,000 or more per year and perform some exempt duties.

By way of background, to qualify for one of the white collar exemptions, an employee must (1) be paid on a salary basis, (2) meet the minimum regulatory salary threshold per year and per week and (3) perform exempt duties set forth in the regulations. The highly compensated exempt employees must be paid at least in part on a salary basis equal to the salary for the other white collar exemptions (the balance can be bonus payments or commissions) and perform primarily office or non-manual work plus at least one of the exempt duties of one of the other white collar exempt categories.

The new salary amounts and the mandated future increases every three years are based on the 40th percentile of weekly earnings for full time salaried workers in the lowest wage census region of the country ( currently the south) for the white collar exempt employees and based on the 90th percentile of that standard for the highly compensated employees.

One bone which the DOL tossed to employers is the ability to use nondiscretionary bonuses and incentive payments such as commissions to satisfy up to 10% of the new salary threshold for exempt white collar employees (but not for the highly compensated employees). These nondiscretionary bonus payments must be made on a quarterly or more frequent basis. As a result, annual bonus or incentive programs would have to be restructured to meet this quarterly payment requirement. Factors that indicate that a bonus or incentive payment is nondiscretionary include advance notice to employees of the right to the payment, set times of payment and set amounts or formulas for payment. If an employee fails to earn a sufficient bonus or incentive, employers are permitted to make a catch up salary payment at the end of each quarter. If an employer fails to make the catch up payment, the employee becomes non-exempt and would be entitled to retroactive overtime pay.

Some tips and thoughts for dealing with compliance issues in this shake up include:

  1. Identifying all employees currently classified as exempt and performing a new analysis of whether these employees meet one of the exemptions. The primary question here is compliance with the required duties for a particular exemption. The various duties tests have not changed under the new rules. If you have employees in a gray area or about whom you have had ongoing concerns as to whether they truly meet the exemption, this shake up in the overtime rules gives companies a perfect opportunity and easy explanation for reclassifying an employee from exempt to hourly.
  2. Given budgetary and other workplace constraints, companies need to determine whether to reclassify to non-exempt status even those employees who meet all of the current duties tests if the higher salary is not feasible for the business model or the industry or the geographic region. Careful consideration must also be given to addressing the morale issues created by telling a manager or supervisor that they will now be treated as an hourly employee and will have to keep time records and lose a lot of their work schedule flexibility and maybe even benefits, such as company provided cell phones, or laptops, or vehicles or other perks.
  3. Processes need to be established for controlling overtime performance. Newly reclassified employees who are used to doing whatever needs to be done to complete a job or a task may have to be reined in to avoid excessive amounts of overtime that were not expected or planned for. Remember that non-exempt employees are generally entitled to payment at one and a half times their “regular rate” for every hour they work over forty in a work week under Federal law. These previously managerial employees may be used to staying late to get the job done or working at home after hours responding to emails, preparing reports or making phone calls to get the job done. If they are no longer exempt, all of this time has to be compensated even if they perform this work in violation of company rules prohibiting overtime work without approval. Companies will have to consider carefully how to deal with continuing to meet productivity requirements or customer service expectations while carefully managing what now falls in the overtime payment bucket for many of these employees if they are reclassified. Duties may have to be redistributed to others to ensure continuity and manage overtime. Job descriptions and requirements will need to be reviewed and revised for those who are reclassified not just to control overtime but to address related issues such as requirements for training and travel time both of which become compensable time for non-exempt employees.
  4. Some companies have already required employees to keep time records at all levels of the work force in order to better analyze exactly what everybody is doing and how many hours they spend doing it in order to plan for how to meet productivity needs while at the same time controlling the overtime budget and devising new compensation models. Time records, especially regarding overtime work, aid in making the final decision about reclassifying or raising salaries. Time records help determine how to set the hourly rate to use if an employee is reclassified or may aid in deciding if other types of compensation methods permitted by the DOL might better apply to a reclassified employee.
  5. All aspects of a current exempt employee’s compensation must be considered to determine how that employee will be compensated going forward either as an exempt employee or a reclassified non-exempt employee. For example, if employees are entitled to certain types of bonuses or incentive payments or commissions, if you reclassify them to a non-exempt position, will they continue to be entitled to those compensation elements since in some circumstances payments of those types have to be factored into determining the amount of their “regular rate” of pay for purposes of calculating the one and a half times overtime payment. If they remain exempt and their salary is increased, will there be adjustments to these other aspects of compensation to offset the new higher salary level? Companies may need to run a variety of financial scenarios to see how various adjustments to compensation factor into compensation models for their “new workforce”.

There is no easy bright line answer to these questions and in most cases it requires a unique case by case analysis that fits the needs and the workforce of each company.

It is anticipated that Fair Labor Standards Act law suits will surely follow the regulatory implementation date in significant numbers. Compliance with these new regulations will be complicated and puzzling for a while. Do not doubt that plaintiffs’ lawyers will take advantage of this opportunity to challenge exempt classifications or payment of overtime and so our final tip is to call your lawyer early and often to assist in making the best most educated decisions possible in implementing a compliance plan under these new regulations.