Exempt Salary Level DOUBLES — What Should Employers Do Now?

On May 18, 2016, the United States Department of Labor (DOL) issued final regulations that will more than double the weekly salary amount required for managerial, administrative and professional employees to be exempt from receiving overtime pay for hours worked in excess of 40 per week. Effective December 1, 2016, the current level of $455 per week ($23,660 per year) will increase to $913 per week ($47,476 annually).  The salary level will be indexed for the first time – every three years beginning January 1, 2020, the DOL will adjust the salary level for inflation. The final regulations include a provision that will allow up to 10% of the salary threshold to be met by non-discretionary bonuses, incentive pay or commissions, provided that these payments are made on at least a quarterly basis.

Certain employees who do not qualify for exemption as managers, administrators or professionals may be exempt if they are “highly compensated.” The annual salary level to meet this exemption will increase from the current $100,000 per year to $134,000. Bonus, incentive and commission payments may not make up part of the salary to highly compensated employees.

All this means that effective December 1, 2016, many currently exempt employees will suddenly no longer be exempt from receiving overtime pay unless their employers provide them substantial pay increases. All employers need to prepare for this significant change.

What should employers do to prepare? Here is a list of actions to consider:

  • Identify employees who may need to be reclassified or paid more. Generally, this will be current managers, administrators and professional employees who are exempt because of their duties and level of responsibility but paid less than $47,476.00 annually. Note that employer-provided benefits do not count toward meeting the threshold.
    • Because exempt employees need not track their hours it may be difficult to understand how many hours they are actually working.
    • Analyze whether employees exempt because of the salary level are actually exempt under the duties tests as well.
  • Do the math. Calculate the feasibility and costs of raising the pay of currently exempt employees to the new threshold level or reclassifying employees as nonexempt and paying overtime. Another option could be lowering pay to offset the overtime requirement. Projecting these costs will make deciding the course of action to take easier once the rule takes effect.
  • Analyze duties and organizational impact. Study the amount of time managerial and administrative employees spend on the particular tasks of their positions. Review job descriptions and tasks of impacted positions: can certain exempt tasks be reassigned or should they stay with the current position?
    • How will pay changes or changes in job assignments affect the organization as a whole?
    • Will process or structural changes be needed?
    • Will some employees holding the same job level be exempt and others non-exempt after the salary level changes – what will that mean for how the organization operates?
    • Will benefits need to be adjusted?
    • Will policies need to be revised
  • Prepare to administer and enforce.
    • Develop administrative plans to ensure compliance when the regulations become official.
    • Off the clock work must be prevented and plans to ensure that it is addressed must be ready to roll when the changes become effective.
    • Training for all levels of management must be planned and executed.
  • Prepare for an employee relations fall-out.
    • Negative employee morale will be a major concern. Reclassifying managers and professionals and requiring them to track time will likely be met with unhappy resistance, as will less flexibility regarding their ability to take off time.
    • Prepare a unified plan of communication to employees about how and why changes are going to be implemented. A key message to employees should be that changes should not result in a decrease in pay and are required by law.
    • Develop a plan for following-up with employees and monitoring compliance with the new policies.
  • Check payroll systems and timekeeping tools to ensure they are sufficient for the additional employees who will now be required to use them.
  • Lastly, and most importantly, don’t hesitate to seek legal help to ensure compliance and help maneuver through the DOL regulations and classification changes. There are serious financial consequences for employers found in violation. The DOL’s budget for FY2017 includes $277 million for wage and hour division enforcement, an increase of $50 million from FY2016. Once the rule becomes effective, the DOL plans to send out its auditors to ensure employers are in compliance. Although there is talk in the media about possible lawsuits or Congressional action to block the new rules, it would be a mistake to delay taking the steps we recommend on the assumption that the rule changes will not go into effect as scheduled.

If you have any questions regarding this Client Alert, please contact Joe Hofmann at 717.399.6643 or the Stevens & Lee attorney with whom you normally consult for labor and employment matters.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.