New FLSA regs will boost employer payroll costs

Astute employers are reviewing available options to mitigate the potential economic impact of the imminent release of new federal Fair Labor Standards Act overtime regulations. The Department of Labor estimates that average annualized direct employer costs could total between $239.6 and $255.3 million per year.

While the DOL initially committed to issuing the new FLSA regs by July 2016, some commentators have suggested that the release date could be much sooner. “This is an election year and the DOL wants to push out its agenda before a new regime takes over,” says H. Carlton Hilson, an associate in the Birmingham, Alabama office of Burr & Forman LLP.

Based on draft regulations released for comment in July 2015, it appears that the DOL is planning to revise the regulations governing which executive, administrative, and professional employees (white collar workers) are entitled to the FLSA’s overtime pay protections. The Department last updated these regulations in 2004, and the current salary cap for exemption is above $455 per week ($23,660 per year).

The proposed rule would increase the salary level to the 40^th percentile of weekly earnings for full-time salaried workers projected to be $970/week ($50,440/year) in 2016. There will also be changes to the exemption for highly compensated employees. At the present time, to qualify for this exemption, employees must earn at least $100,000/year. The new HCE compensation level will be tied to the 90^th percentile of earnings for full-time salaried workers ($122,148/year) in 2016.

The DOL also plans to automatically increase the salary level each year, either based on percentiles of earnings for full-time salaried workers or changes in inflation.

Alison Cooke, an associate with the Lexington, Kentucky office of Stoll Keenon Ogden PLLC, says it is important to understand that salary level alone is not the deciding factor when it comes to correctly categorizing employees as exempt or non-exempt for overtime purposes. “They also have to be salaried [as opposed to hourly] employees and meet the duties test to qualify for the ‘white collar exemption,’” she says.

The FLSA's white collar exemptions exclude certain executive, administrative, and professional employees from federal overtime rules. Specified computer professionals and outside sales employees are also excluded from these requirements.

To qualify for the executive exemption, an employee must direct the work of at least two or more full-time employees and have the authority to hire and fire other staff.
“It’s possible a manager might direct the work of other people but not be permitted to hire or terminate staff. However if she earns over $100,000, as an HCE she would also be overtime exempt,” Cooke says.

The DOL did not include proposed amendments to the duties test in the draft regulations issued for consultations last year, but comments were subsequently solicited for possible changes. It still is unclear what those modifications may be, but Hilson says, “I suppose the executive definition could be enhanced to require that in a given work week an employee must perform management or exempt duties at least 50% of the time.”

Actions employers can take

In view of DOL’s projection that in the first year 4.6 million employees exempt under the current regulation because they earn at least $23,660/year will become non-exempt because of the higher annual salary threshold, Cooke says employers need to understand the impact of the new rules on their workforce, and possible steps they can take to minimize the hit to their bottom line.

“We have been advising employers to conduct a wage and hours audit to assess whether employee classifications will still be correct based on changes to the new salary thresholds,” says Cooke. “They also need to analyze their workers’ duties – particularly those who are affected by the changes in the compensation limits.”

Hilson believes most employers will select one of the following three options:

Give employees close to the new minimum salary threshold a raise to boost them over that figure so they remain overtime exempt.

Switch employees from salaried to hourly and introduce a workplace policy that these employees cannot work more than 40 hours without authorization from management.

Transition employees from salaried to hourly and pay them overtime at 1.5 times their normal hourly rate.

In a client alert, Burr & Forman partner Ron Flowers suggests other creative alternatives may be modifying employee’s pay by adjusting the salary or hourly rate; paying a salary that compensates for more than 40 hours/week; or adopting a fluctuating work week.

Nevertheless, Hilson acknowledges all of these options are not without possible pitfalls. “For example, if a company has an employee that is over the $50,000 range and the people making less than that particular employee are getting raises, you better believe that everyone else is going to believe that they should receive a corresponding raise as well,” he says.

He also notes that the new rules could impose a significant administrative burden on employers. “Many companies currently don't track hours, because all of their employees are exempt, salaried employees. If they change to an hourly compensation method they're going to have to put into place timekeeping technology and measures,” he says.

“It is difficult for counsel to recommend concrete changes right until the final regulations are available,” Hilson says. “There is no cookie-cutter plan of action available in response to these changes because every workforce, job and position is different.”