The Fair Labor Standards Act (FLSA) is a rule of exceptions. Most employees are covered by the FLSA and must be paid at least minimum wage and overtime for hours worked over forty in a work week unless covered by an exemption. The exemption is the tricky part. Exemptions are complex, frequently change based on the specific facts of the job held, and are subject, in many instances, to close review by the DOL. While the categories are many and varied, the most common exemptions are the Executive, Administrative and Professional categories. On May 18, 2016, the DOL issued its new rule raising the minimum annual base under which employees in these categories can qualify for one of these exemptions to overtime.
Core Take-Aways
1. The rule is effective December 1, 2016 so you have some time to review your employee classifications and make necessary changes.
2. In order to meet the exemption, employees must earn, as of December 2016, a minimum of $913 per week or $47,476 annually. This rate does not include board, lodging, or benefits.
3. Every three years the salary base will be updated by the DOL.
4. The highly compensated exemption, frequently used for professional categories, moves to $134,004 per year. This will also be subject to change every three years.
5. Employers may use non-discretionary bonuses and payment such as commissions to satisfy the new wage amounts up to a maximum of 10% of the total wages paid.
6. Employers may “true up” the salary for the quarter if the employee does not reach the required amount by the end of the year by making one final payment “sufficient to achieve the required level no later than the next pay period after the end of the quarter.” However, this counts only towards the prior quarters’ salary amounts so does not give the employer the option of paying less throughout the year and then “making it up.” Highly compensated employees may be “trued up” on an annual, not quarterly, basis.
What does this mean for you?
Significant changes of this type are the perfect time for your business to make an assessment of its exemptions and correct what may be long standing problems. Many exemptions are used incorrectly and this will create significant issues going forward.
One of the most misused classifications is the administrative exemption. This requires that the employee exercise significant discretion and independent judgment with respect to management and matters of general business operations. No matter what the most recent revival of “9 to 5” or a T.V. show says, your receptionist probably doesn’t qualify. Neither does the bookkeeper who basically pays the bills and balances the books. Any task that is governed by routine, rules, algorithms or similar processes won’t generally be considered one of independent discretion and judgment. For the executive exemption, the primary duty must be managing the enterprise or recognized division and managing at least two or more other full time employees or the FTE equivalent. If most of the employees are out on leave then it is not managing two or more employees. It has to be day to day management, not prospective management. Further, managing does not mean doing the same job as those employees, so if the employee is just “first among equals” she is unlikely to qualify for the exemption. If the employee spends 50% or more of her time doing the same job as the people she manages, the exemption is unlikely to apply. For professional employees the exemption will generally require advanced degrees and primarily intellectual work. In general, this has applied to doctors, lawyers, architects and similar careers.
What if we were wrong?
Reclassify. Now is the time to correct those errors before the DOL reclassifies them for you and adds a fine. You would need to look at categories as a whole and make determinations based on job activities. Then meet with the employees to discuss the impending changes. Remember that being important to the organization is not what drives the exemption. Many highly critical jobs, like food safety inspectors, aren’t exempt. You will also need to discuss with employees any rules you have for non-exempt employee time recording, use of paid time off and accountability. For hourly employees, time recordation is key and formerly exempt employees may need to be reminded of the process more than once.
What if they are properly classified but we can’t afford the new rates?
The DOL never makes you treat an employee as exempt. The DOL prefers no exemptions at all. However, you will need to assess how losing the exemption might impact payroll and planning. If your revenue stream is dependent upon preexisting contracts or grants, those contract or reimbursement rates are unlikely to keep pace with the rising wage base. This makes keeping existing exemptions even more difficult in this circumstance. If you have highly flexible hours, classification as non-exempt and commensurate unplanned overtime could have unexpected effects on your budget. If you are planning on dividing groups, such as those with more seniority and a higher wage being considered exempt, and those doing the same job at a lower wage being non-exempt, you will need to take into consideration that wages are not the only factor that determines the exemption. If employees are doing the same job and the only demarcation is the wage and seniority, you could lose the exemption.
What about managing overtime?
You may have to add workers, including part time workers, if overtime has been a way of life for your company. Additional rules about when and how overtime can be worked may need to be assessed as well as more accountability for those employees who have previously “worked from home.”
Think about how you use electronic communication as constant emails employees are expected to review from home or cell phone calls add to “hours worked.” You can also assess the employee’s new regular rate and set that rate based on anticipated overtime. The law requires that you pay workers the applicable minimum wage and overtime where appropriate, it doesn’t say the base rate has to stay the same if the job classification changes.
What not to do?
Do not be tempted to reclassify workers as independent contractors to address these issues. The category of independent contractor (IC) has been subject to strict scrutiny over the last several years not only from the DOL, but also the IRS and Workforce Development. Independent contractors are a very limited category and many investigators, such as those with the IRS, start with the premise if the IC is not a separate company, it won’t qualify as an IC. The hurdle for someone who was previously classified as an employee is likely to be insurmountable. Penalties, back payroll, and tax problems are too high a price to pay for a misclassification of a prior employee as an independent contractor.
