Back in March 2019, we shared with you that some proposed changes to the Fair Labor Standards Act (FLSA) were on their way. Well, it’s official . . . they’ve arrived and it’s time for us to digest the changes and get an implementation plan in place.
To help us understand what’s going on with the FLSA, I reached out to our friends at Foley & Lardner, LLP. They’ve helped us answer questions before, including this one about eliminating employee benefits. I’m delighted that Alexander R. P. Dunn is an associate and litigation lawyer in Foley’s Milwaukee office has offered to assist. Alex is a member of the firm’s labor and employment practice.
Please remember that Alex has a regular full-time job as a lawyer and he’s doing this to give back to the profession. 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 and employment attorney.
Alex, before we get to the FLSA announcement itself, let’s talk about what this new rule is focused on. (i.e. What’s the salary threshold)?
[Dunn] The salary threshold is a bit like a minimum wage for salaried employees. Under the Fair Labor Standards Act (FLSA), employees are essentially classified into two groups and there are different legal requirements for each type of employee:
- Employees who earn hourly wages have to be paid a minimum hourly wage, and they are entitled to overtime pay for each additional hour worked over 40 hours per week.
- Professional, executive, and administrative employees who earn a salary and also satisfy a ‘duties test’ are known as ‘exempt’ employees because the overtime provisions of the FLSA do not apply to them.
For exempt employees, each employee must receive a certain minimum guaranteed salary every week. This minimum salary threshold is the subject of the new U.S. Department of Labor (DOL) rule, which increases the threshold from its current level at $455 per week ($23,660 annually) to $684 per week ($35,568 annually) beginning on January 1, 2020.
Back in 2016, the U.S. Department of Labor was planning to make some BIG changes to the FLSA, including increasing the salary threshold applicable for exemptions. Did that law ever go into effect?
[Dunn] No, that rule did not go into effect.
In 2015, the Obama-era DOL proposed a rule to increase the minimum salary threshold. After proceeding through the standard notice-and-comment rulemaking process, the DOL’s final rule, at the time scheduled to go into effect on December 1, 2016, would have more than doubled the minimum salary threshold to $913 per week ($47,476 annually).
In November 2016, after twenty-one states and dozens of business organizations challenged the rule in court, a federal judge in Texas issued a nationwide injunction that prevented the rule from going into effect. A DOL appeal of that ruling was held in abeyance (put on hold, essentially) while the new Trump-era DOL weighed its options. Ultimately, the DOL decided to propose a new rule earlier this year that rescinds the Obama-era rule and implements a more modest increase in the salary threshold. That rule is now the final rule.
Okay, NOW tell us the new proposed FLSA rule and when it goes into effect.
[Dunn] For most people, the most immediate and most significant change is the increase to the minimum salary threshold for exempt employees.
- The CURRENT minimum salary threshold is $455 per week ($23,660 annually).
- The DOL’s NEW rule raises the minimum salary threshold to $684 per week ($35,568 annually). Any exempt employee who currently earns a weekly salary that is less than $684 per week will be impacted by this new rule.
However, the rule makes a number of other important changes. In addition to raising the minimum salary threshold, the new rule allows employers to use nondiscretionary bonuses and/or incentive payments to make up part of an employee’s salary—up to 10%. In practice, this means that an employer who pays a 5% bonus every year to an employee can count that 5% toward the minimum salary threshold. But, if the employee does not earn the bonus, the employer will have to either make up the difference between the minimum required amount or be forced to pay overtime. In other words, what an employer can do is hold back up to 10% of the employee’s weekly pay and pay it as a bonus at the end of the year but cannot impose requirements that might jeopardize the bonus if the employer is using it to ensure the salaried threshold is met.
The new rule will also increase various other salary thresholds. The threshold for so-called ‘highly compensated employees’ will increase to $107,432 annually, while the special salary threshold in U.S. territories will increase to $455 per week (except American Samoa, where the special salary will remain at $380 per week).
These changes all take effect on January 1, 2020.
Speaking of the 2020 effective date, what should organizations do to get prepared?
[Dunn] The first step for any organization is to look at whether any of their employees are paid below the new salary thresholds but are classified as exempt. If all of your employees paid below the new salary thresholds are paid hourly, then this new rule isn’t likely to affect you.
If all of your employees are paid a salary and that salary is greater than $684 per week ($35,568 annually), you also probably won’t be affected by this rule. However, organizations with employees who receive a salary in excess of the current minimum, but less than the minimum come January 2020, will need to take additional steps.
Once an organization determines that it will need to make compensation changes to comply with the new rule, organizations will have to consider how to make those changes.
- Option 1: Increase employee salaries across the board to comply with the new minimum.
- Option 2: Keep employee pay below the salary minimum and switch to compensating employees hourly.
- Option 3: Do a little of both: increase some employee salaries to comply with the minimum and keep some employee compensation level while switching them to hourly.
Aside from just the dollars and cents of compensation decisions like this, organizations should be thoughtful about how these decisions will impact morale and organizational culture. Not having to track hours worked can be a status symbol and a point of pride, so losing that status may have negative consequences for the worker and the organization. Likewise, seeing that certain employees are having their salaries increased while others are not, and instead are switching to hourly wages, may send a message about organizational culture and priorities. Remember, too, that this transition will likely occur during or shortly after the holiday season.
Employers must also be cautioned: simply paying an employee the minimum weekly salary does not make them exempt. Employees must perform certain duties to be properly classified as exempt.
I’m sure some readers are thinking it, so I’m going to ask. Is there any chance that the current administration might change their mind and not go through with this FLSA change? And if so, what can organizations do to avoid wasting resources preparing (and then finding out it was all for nothing)?
[Dunn] The last time that the DOL increased the minimum salary threshold was in 2004 and this rule change has been a priority for the DOL for years now. In fact, the DOL’s final rule notes in several places that it is the Department’s intent to update the minimum salary threshold more often in the future to avoid another long period of inactivity. Some groups have already stated that they may file a legal challenge to this new rule, so employers should continue to pay attention over the coming months. Nevertheless, the law is set to change on January 1, 2020, and employers need to be prepared.
However, for the professional cynics, preparation for this change in the law can still be a positive. If the DOL’s stated intent to update the salary threshold more often in the future proves true, we may see increases to the minimum salary threshold more frequently going forward. Organizations that use this increase as an opportunity to streamline their review process and establish best practices will be ahead of the curve when it comes time to adapt to a new minimum salary threshold three, four, or five years from now.
Aside from building capacity to respond to future threshold increases, it is just good organizational hygiene to review employee designations from time to time to make sure that your designations are appropriate under the law and consistent with your organizational goals and culture. This is a great opportunity for organizations to take a step back and consider whether there are different choices they want to make in this space.
Last question and this kinda plays of the previous one. As a human resources professional, how do I convince the naysayers on my senior management team who are going to say, “We’re tired of the FLSA flip flops. We’ll deal with the law when we know it’s gonna happen … in January 2020 … after it really happens.”
[Dunn] ‘We didn’t think it was actually going to happen.’ isn’t a legal defense. At the risk of stating the obvious, the whole reason the DOL set up this rule to go into effect on January 1, 2020, is so that organizations have time to understand the rule, understand how it applies to them, and take steps to comply with the rule.
Waiting until the rule actually goes into effect not only puts your organization at risk of a lawsuit, it also squanders a perfectly good opportunity to determine the best method of compliance with the rule at a pace that suits your organization (as long as your pace is before January 1) and put the appropriate communication into place.
Put simply, there is no grace period to come into compliance after the rule goes into effect. The grace period is now.
My thanks to Alex and the Foley team for helping us understand what’s happening and offering some food for thought when it comes to implementing these changes within the organization. If you’re looking to stay on top of labor and employment law issues (and I know you are), be sure to follow Foley’s Labor & Employment Law Perspectives blog – it’s on my must-read list.
I understand that HR compliance might not always be the sexiest part of our jobs. But it’s necessary. Very necessary. Organizations have lots of compliance related matters in every aspect of the business – accounting, environmental, safety, and HR. We’re simply doing our part by keeping the organization in HR compliance.
Image captured by Sharlyn Lauby at the 34th Street Graffiti Wall in Gainesville, FL13