The United States Department of Labor (DOL) is expected today, May 18, 2016, to unveil its long-awaited changes to the Fair Labor Standards Act (FLSA) regulations. Based upon preliminary DOL reports, the salary threshold will be increased to $47,476 annually ($913/week) from the current threshold of $23,660 annually ($455/week).  For the highly compensated employee the threshold moves from $100,000 to $134,004.  Employers will have until December 1, 2016 to come into compliance with the new requirements. These thresholds will be updated every three years, beginning on January 1, 2020.

In a significant departure from past practice, the FLSA regulations will allow nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary test requirement. For such payments to count toward salary, the payments must be paid on a quarterly or more frequent basis.

It is worth noting that there will be no changes to the primary duties test, as feared by many, and no requirement that exempt duties be performed a set percentage of time.  

Employers now have a bit more than six months to determine how to address the changes.  There are several options available, including the following:

• Raise salaries: For workers whose salaries are close to the new threshold and who meet the duties test, employers may decide to raise salaries to meet the new threshold and maintain the employees’ exempt status

• Pay a salary plus overtime at time and a half for more than 40 hours:  Employers may continue to pay employees on a salary basis, and pay overtime for hours that exceed forty in a workweek.  

• Pay overtime above a salary for other than 40 hours:  For employees who regularly work more than 40 hours, or who work irregular hours, employers may choose to pay a salary that is intended to compensate at “straight time” for hours in excess of 40 hours, such that only the one-half overtime premium is owed for overtime. Thus, for example, if a worker works a regular work week of 45 hours, the salary could compensate the employee for straight time for 45 hours.  One-half the regular rate would be due for hours 40-45. Similarly, an employee who has a “fluctuating workweek” may be paid a salary that is intended to compensate for all hours worked at straight time. There are specific requirements for the “fluctuating workweek” under the existing regulations.

• Convert employees to hourly:  While not required by the regulations, employees who are non-exempt may be converted to hourly employees.

• Realign employee workload: Employers may wish to shift workload or eliminate some tasks for non-exempt workers to keep weekly hours under 40. Some employers may find it more cost-effective to retain temporary or seasonal help rather than have regular workers working overtime during busy times.

• Adjust employees’ base pay and pay overtime: Employers can adjust the amount of an employee’s earnings to reallocate it between regular rate of pay and overtime compensation, particularly for employees who work predictable overtime. Thus, an employee’s salary or hourly rate may be reduced so that, once overtime is added to regular pay, the amount of an employee’s total wages remains relatively constant.

Employers should not underestimate the non-financial impact on their organizations.  Employers will need to implement timekeeping requirements for employees who never before had to keep close track their hours. Many employers do not closely track the use of leave time for salaried workers; this may need to change for re-classified employees. Employers will also need to keep a careful eye on “off-the-clock” time, especially through use of mobile devices, for employees who are now eligible for overtime.  Employers should expect to address morale issues arising from these changes, and should develop a communications plan to help employees through the transition.

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