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PRACTICAL ADVICE FOR COMPLYING WITH THE FLSA’S NEW WHITE COLLAR EXEMPTION RULESBrian Crawford
Russell Bruch
October 18, 2016
© 2016 Morgan, Lewis & Bockius LLP
BACKGROUND ON THE FLSA’S WHITE COLLAR EXEMPTIONS
Background
• The FLSA’s white collar exemptions exclude certain executive, administrative, professional, and computer employees from federal minimum wage and overtime requirements.
• Currently, to qualify for one of these exemptions, employees generally must:
– be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (salary basis test);
– be paid more than a specified salary threshold, currently $455 per week or $23,660 annually (the salary level test); and
– primarily perform executive, administrative or professional duties as provided in the US Department of Labor’s (DOL’s) regulations (the duties test).
• Additionally, certain highly compensated employees are exempt from the FLSA’s overtime pay requirements if they are paid total annual compensation of at least $100,000.
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Background
• The DOL defines who qualifies for the white collar exemptions.
• The DOL last updated the white collar regulations in April 2004.
• In March 2014, President Barack Obama directed the Secretary of Labor to “modernize and streamline” the DOL’s white collar exemption regulations.
• On June 30, 2015, the DOL released proposed regulations and a request for comments on a variety of issues.
• On May 18, 2016, the DOL issued its Final Rule.
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REVISIONS IN THE FINAL RULE
Revisions In Final Rule
• The DOL’s Final Rule sets forth four key changes to the current exemption test:
1. Increases the minimum salary needed to qualify for the FLSA’s white collar exemptions;
2. Amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new minimum salary level;
3. Increases the total annual compensation requirement for highly compensated employees; and
4. Establishes a mechanism to update these salary and compensation levels automatically every three years.
• The Final Rule did not change the “duties test.”
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Changes To The Minimum Salary Level
• The Final Rule increases the minimum salary level needed to qualify for the white collar exemptions from $455 per week or $23,660 annually to $913 per week or $47,476 annually. • Exempt computer employees can still be compensated on an hourly basis at a
rate of not less than $27.63 an hour.
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Use Of Nondiscretionary Bonuses And Incentive Payments
• The Final Rule amends the salary basis test to allow employers to use incentive payments (including commissions) and nondiscretionary bonuses to satisfy up to 10% of the new minimum salary level.
• For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the minimum required salary level, the payments must be made on a quarterly or more frequent basis.
• The Final Rule also permits an employer to make a “catch-up” payment in the event that an employee does not receive enough in nondiscretionary bonuses and incentive payments to remain exempt.
– The employer has one pay period to make up the shortfall (up to 10 percent of the standard salary for the preceding 13-week period).
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Changes For Highly Compensated Employees
• The Final Rule increases the minimum total annual compensation requirement needed to qualify for the highly compensated exemption from $100,000 to $134,004.
• These employees must receive at least the new minimum salary amount each pay period without regard to the payment of commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
• The remainder of the total annual compensation required ($86,528 or less) may consist of commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
• This incentive compensation can be paid on an annual basis (no change to current rules).
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Automatic Updating
• The first automatic update will take effect on January 1, 2020.
• The DOL will publish future updated rates in the Federal Register and on its website at least 150 days before their effective dates.
• The DOL estimates that in 2020, the new salary threshold will be $51,168.
• The DOL estimates that in 2020, the compensation threshold for the highly compensated exemption will be $147,524.
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The Effective Date
• The effective date of the changes in the Final Rule is December 1, 2016.
• Rule is facing both political and legal challenges.
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© 2016 Morgan, Lewis & Bockius LLP
RECOMMENDED NEXT STEPS
Recommended Next Steps
• Identify employees affected by the salary threshold increase and those who may be affected by the future increases.
• Evaluate the benefits and costs of reclassification versus salary increases.
– Determine the hours worked for those employees close to or under the salary threshold.
– Begin a cost-benefit analysis of adjusting the salaries to above the threshold, compared to reclassifying as nonexempt employees who fall below the proposed salary threshold.
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Recommended Next Steps
• For those employees who will be reclassified as nonexempt:
– Prepare talking points for managers and the employees about the change, the reason for the change, and the impact of the change.
– How will it impact their compensation?
– Impact on benefits?
– Other changes, e.g., time recording, ability to work from home, the need to seek approval before working overtime.
– Address concerns about perceived loss of status, opportunities for advancement, etc.
• Employees likely will have questions about the past.
– A clear communication plan focused on the recent change in the law will be essential to navigating those inquiries.
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Recommended Next Steps
• As part of the reclassification process, evaluate alternative compensation plans such as:
– Utilizing the fluctuating workweek method (if state law permits); or
– Converting to an hourly compensation system with an hourly rate that anticipates an estimated amount of overtime each week.
• Prepare training exercises for employees who have been reclassified and are not used to reporting time.
– Make sure employees, managers, and HR understand what is and what is not “compensable time.”
• Monitor and audit timekeeping practices of newly reclassified employees to ensure they are following proper steps and procedures.
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Recommended Next Steps
• Make sure that you are calculating the regular rate correctly if the employees receive incentive compensation.
• Make sure you comply with state law for nonexempt employees.
• Start preparing and budgeting for increases in the salary level.
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© 2016 Morgan, Lewis & Bockius LLP
REDUCING RISK GOING FORWARD
Reducing Risk Going Forward
• Plaintiffs’ counsel have confirmed that they expect these changes to result in a significant increase in misclassification and off-the-clock litigation.
– Plaintiffs’ counsel anticipate that many of the reclassified employees will still be performing jobs that do not meet the duties test.
– Plaintiffs’ counsel also anticipate that in order to keep budgets in line, employees will be pressured to work off the clock, especially if there is no increase in headcount.
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Reducing Risk Going Forward
• Consider the pros and cons of arbitration agreements.
• Consider benefits of class and/or collective action waivers.
– There are legislative proposals attacking these agreements
– The NLRB is hostile
– There are risks of no real appellate review
– Company may have to pay costs
• Consider this an “opportunity” to reclassify other at-risk positions in the company.
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Reducing Risk Going Forward
• Be aware of risks involved in reclassifying employees who have routinely worked many hours in the past.
– Attempts to limit the hours worked by such employees to reduce overtime can cause performance issues and prevent employees from meeting their prior workloads.
– Stress to managers and employees that “off-the-clock” work is not permitted.
– In the alternative, allowing unlimited overtime will lead to additional costs per employee and should be monitored for business needs.
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Presenters
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Russell BruchWashington, [email protected]
Brian CrawfordWashington, [email protected]
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© 2016 Morgan, Lewis & Bockius LLP
THANK YOU
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