Ghazal Vahora

Associate

ghazal@jmsmithlaw.com

The U.S. Department of Labor (USDOL) will soon implement proposed regulations that will drastically reduce the number of employees who qualify for the white-collar overtime exception to the federal Fair Labor Standards Act (FLSA). Given the pace at which this proposed regulation will likely become law, employers should immediately begin reviewing their exempt positions and considering pay changes.

What is the “White-Collar” Exemption?

The FLSA requires that most employees be paid at least federal minimum wage for all hours worked and overtime pay for all hours worked over 40 hours in a workweek. However, certain “white-collar” employees employed as bona fide executive, administrative, professional and outside sales employees are exempt from this FLSA requirement. Among other considerations, to qualify for the exemption, an employee must be (a) compensated on a salary or fee basis at a rate of at least $23,660 per year and (b) his or her primary duty must be “white-collar” work such as administrative or specialized work so if on salaryh er employee membership. collective barganing stitute administr work.

What Changes are Anticipated?

Two widely anticipated changes to the exemption includes (a) the drastic increase of the annual salary threshold to almost $50,440 (more than double of the previous standard) and (b) a test requiring exempt employees to spend more than 50% of his or her time on tasks deemed exempt.

However, the exempt criteria will probably not be simplified, despite President Obama’s call to make it easier for employees and employers to understand. Therefore, the complex, subjective, and ambiguous manner by which employee exemption status is determined will likely remain.

What is the Timeline for the Proposal?

Given the Department of Labor’s “fast-track” propensity, the FLSA changes will likely become law and require employers to comply as soon as the first quarter of 2016.

At the moment, the White House OMB Office of Information and Regulatory Affairs is completing its review of proposed regulations it received in May. Once completed, the Department of Labor will publish its proposed regulations sometime in June for comment. The public comment period will likely be brief—perhaps no more than 60 days. After USDOL reviews the comments, the final regulation will likely be published sometime in the fourth quarter of 2015 and the implementation period will likely begin in the first quarter of 2016.

Furthermore, since other labor and employment matters are higher on the priority list of most Congressmen and no potential plaintiffs have come forward, neither Congress nor litigation will likely curb these changes.

What is the Impact of the Likely Changes?

The proposed FLSA regulations will have vast and diverse practical impact including:

  1. Fewer exempt employees: The most obvious impact of the new regulation doubling the annual salary threshold is that fewer employees will qualify under the “white-collar” exemption to the FLSA. Also, publicity from the new regulation may lead exempt employees to question their classification, institute administrative complaints or even lawsuits to change their status.
  2. Difficult Exemption Determination: Since the new regulation may actually increase the arbitrary and complex nature of determining which employees are exempt and which are not, it will be more difficult to determine exemption status of employees that are within 10% of the new threshold.
  3. Collective Bargaining Agreement (“CBA”) Implications: Employees that are reclassified as non-exempt as a result of the threshold increase may become part of the bargaining unit in a collective bargaining agreement. Therefore, employers may need to comply with CBAs with higher employee membership.

What do Employers Need to Do?

Since the USDOL final regulations will be implemented very soon, employers need to consider the following changes in order to minimize the negative impacts of the regulation on their business.

  1. Review Job Descriptions: Employers should review current job descriptions to accurately reflect their exempt or non-exempt status. Ideally, a person unfamiliar with the company should be able to determine whether a position involves at least 50% “exempt” tasks. Employers should therefore be careful with the duties assigned to each position.
  2. Follow up with Current Positions: To maintain their exempt status under the new regulation, employers should ensure current positions are adhering to the 50% rule in practice. This may require following up with current positions and detailing tasks assigned to each individual, rearranging delegated duties, promoting or demoting individuals, or changing salary structure of individuals.
  3. Determine a Plan for Gray Zone Employees: The most pressing issue for employers will be to determine a plan to deal with currently exempt employees that may be in the gray zone in the new regulation between clearly exempt and clearly not exempt. Keeping in mind that the law neither requires guaranteed overtime work nor mandates pay increases for employees whose classification changes, employers have many [complex] options to determine how to both comply with the new regulation and minimize its negative effects including: increasing the salary to meet the new salary threshold or converting roles to nonexempt status; implementing changes to bonuses, benefits, and work schedules; changing the salary structure to hourly wage configured such that it is roughly the same as the previous salary; or, unfortunately, decreasing the workforce.
  4. Spread the Word: Company leaders should know about the impending regulation change and realize that compliance will likely have a disruptive effect on business. Reclassifying a large number of individuals from exempt to non-exempt status (or vice versa) will not only require analyzing compensation and benefit, but may also effect employee morale. Since formerly exempt salaried employees may perceive reclassification to hourly wage as a demotion, employers should address this concern to maintain a healthy relationship. Furthermore, newly created non-exempt employees will have to be trained on timekeeping, complying with break/meal requirements and other administrative requirements.
  5. Partner with the Right Counsel: Given the breadth of the regulation, the time and effort it will take to implement changes to business, the speed with which changes will become law, and the complexity of options available to employers to transition, employers are strongly advised to involve experienced business attorneys. The guidance of an attorney can not only provide advice to maneuver the intricacies of potential issues, but the availability of the attorney-client privilege allows for open discussions.

If you have questions regarding the anticipated FLSA changes, please feel free to contact Smith Reed & Armstrong, PLLC here.