Protecting Your Practice When Regulations Reign

In the business and human resources (HR) worlds, news of the Fair Labor Standards Act (FLSA) regulations reigned.

By Christine V. Walters

August 2016

No doubt everyone has heard by now that on May 18th the US Department of Labor filed these “final” FLSA regulations. When they were published in the Federal Register on May 23rd, however, an “Announcement of Policy” was also published with an enforcement exception.

In all, business owners, managers, and HR professionals are asking what options are available to comply with the regulations regarding exempt employees, while reducing the adverse fiscal impact to their company or organization. The following is a brief and high-level review of some of the key changes and at least five options available to you. Remember, an employee must meet all three of the following tests in order to be properly classified as exempt.

1. Minimum salary test: This was modified and increased to $913/week or $47,476/year.
2. Duties tests: There were no changes to the duties tests.
3. Salary basis test: This was modified and actually gives employers a little more flexibility to meet the minimum salary test. You may now still classify an employee as exempt even if the guaranteed minimum salary is below $47,476 if (1) you pay to an employee at least quarterly a bonus that provides him with a salary of at least $47,476/year, and (2) the total bonus payments are not more than 10 percent of the annual minimum salary or $4,747.60.
   

   Beware #1: This can be tricky if the bonus is tied to performance and the employee does not earn the bonus in a quarter. There is a “catchup” provision but if not followed you may be liable for overtime hours worked in the quarter in which the bonus was not paid.

The new regulations will go into effect for most covered employers December 1, 2016. There is an enforcement exception (deferral) for certain residential homes and care facilities with fewer than 15 beds.¹ So what do you do now with any employee you currently have classified as exempt but to whom you also pay an annual salary of less than $47,476? The following options all assume the person is properly classified as exempt today.

1. Increase the person’s guaranteed minimum salary to meet the new threshold of $47,476 and keep the employee properly classified as exempt. Let’s say an employee’s guaranteed minimum salary today is $45,000. You may increase that effective December 1, 2016, to $47,476 and maintain the employee’s exempt status. The downside of this option is that it may result in wage compression and internal inequities that might require a concomitant increase in pay to those employees whose current salary is just above $47,476.
2. Simply convert the exempt employee to nonexempt and start paying overtime for all hours worked over 40 in a workweek. Calculate the employee’s hourly rate by dividing the current base salary by 2,080 (hours assumed for a full-time employee). The good news to the employee is that, if he or she is currently averaging more than 40 hours per workweek, the wages are likely to increase since the employee will be paid overtime for those hours worked over 40 in a workweek. The downside is this will increase your labor costs, and you need to ensure that budgetary impact is considered prospectively.
3. This is nearly the same as Option #2 but you limit or prohibit overtime hours worked. This option has a few challenges. I think it may not be realistic for a variety of reasons: (1) you still have to pay the overtime rate even it is worked without authorization, and (2) if there is that much work for the employee today I suspect it will be there on and after December 1 so someone is going to have to do it.
4. Follow Option #3, limit or prohibit the overtime, and then hire a part-time employee whom you will pay straight time; thus you avoid paying your current employee the overtime.
5. This is my favorite but don’t let that sway you. Convert the employee to nonexempt at a rate that should keep his or her current, total annual compensation the same as it is now, including with the overtime. You can use a formula to calculate an hourly rate that will provide the employee with the same total compensation he or she currently has, including overtime. The only figure you need in advance is the average number of hours the employee has worked per week over the last 12 months. If you have not been tracking or recording time worked by your exempt employee, then estimate, guesstimate, or simply ask the employee and proceed on good faith.
Beware #2: Each of these options has associated pros and cons. You need to weigh the impact of each to your organization from an employee relations standpoint, assessing the fiscal impact and administrative burdens tied to each option.
Beware #3: Don’t forget your state regulations! At least 16 states have their own “white collar” regulations that apply different definitions and thresholds for determining exempt classification, so be sure you check those as well.

References

1. www.federalregister.gov/articles/2016/05/23/2016-11753/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and. Accessed July 2016.

Christine V. Walters, JD, MAS, SHRM-SCP, SPHR, is an independent human resources and employment law consultant for DBA FiveL Company out of Westminster, Maryland. She can be reached at info@FiveL.net.