I’m not going to write a big long explanation for this post. If you’re in the HR world, you know that the much-awaited final ruling came from the U.S. Department of Labor (DOL) about changes to the overtime rule in the Fair Labor Standards Act (FLSA.) Last summer, I spoke with Jonathan Segal, a partner with the law firm Duane Morris LLP regarding the proposed overtime rule changes to the minimum weekly salary requirement and the primary duty test. When I read that the final rules were released, I asked Jonathan if he would give us the scoop. And he very graciously said yes.
I cannot begin to tell you how thankful I am that Jonathan dropped everything to share his initial thoughts with us. He does have a full-time job that keeps him very busy. Please remember that his comments should not be construed as legal advice or as pertaining to any specific factual situations. If you have detailed questions, you should address them directly with your friendly neighborhood labor attorney.
The U.S. Department of Labor final rule regarding overtime came out last week. What are the key provisions of the new rule?
[Segal] Initially, the DOL proposed effectively $970 per week. In the final rule, the DOL made the weekly minimum salary ‘only’ $913. Even with the reduction from the initial proposal, this is still more than double what the minimum salary currently is under the 2004 regulations.
There is one bit of good news for employers. That is, unlike before, employers now can include certain non-discretionary compensation toward the minimum salary. Specifically, employers can include non-discretionary bonuses, incentive payments and commissions to satisfy up to 10 percent (10%) of the minimum weekly salary.
Also, the DOL had proposed increasing the minimum salary each year. Instead, the DOL, when it finalized the regulations, has mandated increases ‘only’ every three years. Again, this is less than what was feared, but still creates some cost concerns for employers.
The DOL initially had asked a series of questions about the primary duty test. Those questions suggested that the DOL might adopt a percentage approach, like California. Fortunately, the DOL did not adopt a percentage approach. Indeed, it did not change the primary duty test at all. Primary duty still means major or most important. While the standard has not changed, our experience is that the DOL is examining positions more closely.
Reminder: employee gets the benefit of federal or state law, whichever is more protective. Accordingly, California employers remain subject to the percentage test.
There was concern that employers would be given only 60 days to implement. The effective date of the new rules is December 1, 2016. Therefore, employers will have almost six months to prepare.
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While six months seems like a long time to get ready, the time can pass quickly. What types of activities should human resources professionals do in order to get prepared for the changes?
[Segal] HR professionals are going to need to evaluate carefully a number of options before deciding what to do with each employee whose salary falls below the new minimum salary. There is no ‘one-size-fits-all’ answer to the key question we all will face in deciding whether to raise salaries or to convert to non-exempt.
One factor that an employer will need to consider is the impact of an increase of one employee’s salary on other employees. Should other employees who are above the minimum salary get a boost, too?
If the decision is made to increase the employee’s minimum salary now, the employer needs to know that that salary will continue to rise. Can the employer commit now to future increases?
The employer also needs to consider the employer relations considerations in converting the employee from exempt to non-exempt. For some employees, being converted from exempt to non-exempt will be deemed as a demotion.
Moreover, for many, there will be a loss of flexibility if an employee is converted from exempt to non-exempt. We all know that exempt employees have more flexibility in terms of when and where they get the work done compared to non-exempt employees.
It is not sufficient to say that these employees will lose flexibility. By virtue of their jobs, even if they are reclassified as non-exempt, many of them will need some flexibility.
Therefore, employers will need to develop carefully-crafted recordkeeping plans to allow for some remote work by non-exempt employees who previously were exempt. No remote work may avoid legal claims but it may limit your business. So start thinking about guard rails to limit, capture and pay for all remote work. This is deceptively complex issue so please consult with counsel for legal advice
These are but some of the issues that employers will need to consider as they make the decision whether to increase an employee’s salary or to convert him or her to non-exempt.
One of the considerations you mentioned in the last question are the conversations that the company needs to have with employees who are currently exempt (and will become non-exempt when the rule goes into effect.) What are 2-3 tips that organizations need to consider when speaking with employees?
[Segal] Communication is critical if an employee is converted from exempt to non-exempt. As previously noted, the employee may deem this to be a demotion.
I remember in 2004 when law firm paralegals were told they no longer were professionals and would receive overtime. Notwithstanding the potential to earn more money, many were upset.
It is important for the employer to make clear that the change is driven by law and that the employer does not value any less the contributions that the employees provide. Yes, say it: don’t just think it!
Less is not always more so take the time to explain. That may mean preparing bullet points for your managers if HR cannot handle every meeting.
Another consideration you mentioned was the provision in the final rule that automatically updates the minimum salary requirement levels every three (3) years. How does this increase every 3 years affect the decisions employers make now?
[Segal] Employers need to consider first and foremost how they will get the work done. And, yes, that includes the cost of doing so. In determining cost, employers must consider that there will be increases every 3 years. They will be based on the 40th percentile of full-time employees in the South.
Employers may wish, periodically, to look at data from the Bureau of Labor Statistics (BLS) to determine what the 40th percentile is. That may result in a change in course of action before the mandated increase. Keep in mind that, if you increase an employee’s pay and then convert, the cost of overtime will be substantially higher. As noted earlier, the minimum salary will go up every 3 years. What if you can’t keep up?
As a general rule, an employee’s base rate for overtime is all compensation (subject only to certain enumerated exceptions) divided by 40. The employee usually receives 1.5 times the base rates for overtime hours (that is, over 40). Reminder: in California, it is after 8 hours in a day.
So, let’s assume you raise an employee now from $750 per week to $913 per week and then over the next 3 years to $1,000 per week. But let’s project the number the DOL comes up with 3 years from now is $1,100 per week. Too much, you say?
That’s okay. You can convert the employee to non-exempt at a later date but you will be making overtime payments at a much higher level than if you had converted the employee initially and not later.
Yes, we all will be making judgment calls on imperfect information! But isn’t that what HR does all the time as it balances competing considerations?
Last question, where can HR pros go to learn more about the new regulations and how it impacts them? Is your firm putting together a webinar that readers can register for?
[Segal] SHRM is a wonderful source for information. I learn a great deal not only from the webinars but also from its thought leaders on Twitter, in particular, on this issue, Lisa Horn. You can follow her on Twitter @SHRMLobbyistLisa
And our firm is hosting a number of webinars. Thanks for opportunity to share a link: http://bit.do/b2UL3
A HUGE thanks to Jonathan for sharing his knowledge with us. If you want to stay on top of these changes, be sure to follow him on Twitter @Jonathan_HR_Law or read his blog at Duane Morris. This issue is going to be talked about for some time. It’s important to get the information needed to make the right decisions for your organization.1