Major Rule Change for Salaried Employees is Imminent – How to Prepare Now

By Rebecca Goldberg, Esq. on April 14, 2016Posted in Wage & Hour

Big changes may be coming to your payroll before the end of 2016. The U.S. Department of Labor has proposed a rule that would require minimum wage and overtime for some employees who are currently “exempt” from these requirements. Employers need to plan ahead for implementation, as the rule change could lead to seismic shifts in some payrolls. 

Although the proposed rule is expected to be very close to the final rule in substance, the exact language has yet to be finalized and the implementation date is not yet known.

The federal Fair Labor Standards Act (“FLSA”) requires that employees receive minimum wage and overtime (calculated at one-and-a-half times the regular rate of pay for hours over 40) unless they are “exempt” from one or both requirements. The most popular exemptions are the so-called “white collar exemptions,” which apply to executive, administrative, and professional employees who meet rigorous criteria based on their duties. 

To be exempt, these employees must be paid a salary of at least $455 per week and the employer must pay on a salary basis (meaning no docking for partial workweeks, subject to limited exceptions). Doctors, lawyers, and teachers can be exempt under the FLSA even if they are not paid on a salary basis and there is no minimum salary for these employees. (The computer professional exemption has special rules under which employees can be paid hourly, but in any event, there is no computer professional exemption under Connecticut state law.)

The anticipated rule change would more than double the salary threshold from $455 per week ($23,660 annually) to $970 per week ($50,440 annually). Further, these thresholds will be subject to inflationary increases. It is not yet known whether discretionary bonuses will be considered toward these amounts. The duties tests are unlikely to change. The threshold for the “highly compensated employee” exemption is also expected to increase from $100,000 to $122,148, but Connecticut does not recognize this exemption, so employers should not rely upon it for employees in the state.

Raising the salary threshold is expected to transform millions of exempt employees into non-exempt employees overnight. Some employers will be able to weather this change better than others. Virtually every employer in the country is subject to the FLSA, even if there is only one employee. This includes non-profits and public sector employers. In Connecticut, where the cost of living is high, the effect of this change may be lower than elsewhere in the country. It is more likely here than elsewhere that employees who meet the duties tests are already earning at least $970 per week. 

However, non-profit, low-profit, and government employers may find that many of their employees are subject to this rule change and these employers may have more rigid budgets that cannot withstand the impact. Employers with an annual volume of sales or business of less than $500,000 may wish to consult an employment lawyer to see if they are one of the very few employers not subject to the FLSA.

To comply with the rule, employers need to either raise salaries of affected employees to ensure they meet the threshold or begin treating these employees as non-exempt. Raising salaries is straightforward, but remember that the rule is likely to require inflationary increases, so the amount will change going forward. If employers do not wish to raise salaries, the employees must be treated as non-exempt. This means that employers must keep records of their hours worked and they must be paid overtime for hours over 40. It is legally permissible to cap hours at 40 by prohibiting employees from working overtime and some employers may choose to hire multiple employees to do what was once one employee’s job. Collective bargaining agreements may limit employers’ options.

It cannot be overstated how important it is to ensure that employees are properly exempted if they are not going to be paid overtime. Consider the following scenario. A passionate, well educated executive director of a nonprofit organization earns a salary of $969 per week – just one dollar short of the proposed new threshold. She labors with love, working 70 hours most weeks. A disgruntled employee complains to the Department of Labor that he is owed overtime and the agency examines the payroll practices of the entire organization. 

The Department of Labor finds that the executive director is not exempt. It is not that she is underpaid by fifty-two dollars. It is that she is not exempt at all. She is owed unpaid overtime of nearly $57,000 all because she was paid one dollar per week too little to qualify as exempt. (There are some arguments an employer could make to apply more favorable damages calculations, but these arguments have yet to be successful in the Second Circuit.) That is the legal significance of the salary threshold and why employers must be extremely careful. For that matter, when considering the duties tests as well, employers should recognize how a small mistake in classifying an employee or a group of employees could add up to huge liability.

Employers should take time now to review their payroll practices to ensure they are in compliance with state and federal laws now and in the future. For each employee believed to be exempt, ensure that he or she meets the duties tests for the applicable exemption, is paid on a salary if required by the exemption, and is paid a salary that is high enough to support the exemption. In considering the duties of a position, employers should be concerned not with titles or job descriptions, but with how the employee actually spends his or her time. It is a good idea to update job descriptions to match reality.

Ensure that all non-exempt employees’ hours are being tracked, including time spent offsite performing work, on call, or traveling, to the extent required by law. Ensure that break periods of fewer than 20 minutes are treated as working time.

Now is a good time to change payroll practices without raising alarm that perhaps things were not done properly before. Employers can connect changes with the new overtime rule to minimize suspicion, particularly in cases of misclassification. Internal review of payroll practices should be aided by a competent labor and employment attorney, as the rules can be excruciatingly detailed. Using non-attorney human resource consultants or payroll companies for this activity is not advised, as communications will not be privileged. Changes to payroll practices, hours, or other terms or conditions of employment should be communicated to employees well in advance, ideally at least 30 days.

So when will the rule be finalized and when will it go into effect? Employers have had this Sword of Damocles hanging over them since early 2014, when President Obama directed the Department of Labor to update these regulations. The current projection is that the rule would be finalized in July 2016 with an effective date in September 2016, but it is possible the sword will drop sooner. Employers affected by the change should closely monitor the timeline so that they are prepared to comply when the rule goes into effect.

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