The Fair Labor Standards Act (FLSA) was implemented in 1938 during the New Deal in an effort to protect workers and spread employment. With minimal changes to the Act over the years, many believe the archaic law has lost its value. Employers have found loopholes or taken extremely liberal stances when applying FLSA exemptions, removing employees from the requirements – or protections – intended by Congress.
Now, the Department of Labor – backed and prodded by the Obama Administration – is on the cusp of implementing a radical change, one that is expected to affect over 5.6 million workers in the next decade.
Exemptions: Under the current regulatory analysis, “exemptions” are identified that allow employers to exclude certain employees from coverage. So, while the employer is a covered employer, the employee is “exempt” meaning these employees are exceptions and therefore the employer does not need to comply with FLSA requirements. The most commonly used exemptions are often referred to as “white collar” exemptions or EAP exemptions. EAP exemptions refer to: E – Executive, A – Administrative, P – Professional. The other three exemptions available are the HCE – Highly Compensated Employee exemption, Outside Sales and Computer Professional Exemption.
The regulations outline the analysis that employers must pursue when classifying employees for FLSA purposes. Employers should always start with the assumption that the employee is non-exempt, thus subject to the FLSA requirements. To classify an employee as exempt from the FLSA, the first step is to look at the employee’s compensation. To be exempt under the EAP exemptions, an employee must be paid a salary and that salary is not subject – minus a few rare exceptions – to any deductions. If an employee works in a week, he/ she must be paid for the entire week. The other salary requirement is that the salary must be paid at least $455 per week. *Currently the Salary threshold for an HCE employee is $100,000 annually; there is a proposal to increase this.
The $455 threshold that an employee must be paid on a weekly basis is likely to double.
The second prong of the exemption analysis is whether the duties that the employee performs meet the specific requirements for that exemption. Many employers really struggle with this analysis as each employee’s duties vary and the tests can often time be subjectively interpreted.
The duties test may change but this is less certain than the increase to the Salary test.
While we await the Final Rule, employers should ACT now to prepare for significant changes to employees’ employment status.
March 14, 2014: President Obama signed a “Presidential Memorandum” directing the Department of Labor to update the regulations.
July 6, 2015: Notice of Proposed Rulemaking in the Federal Register is published. This proposed rule seeks to increase the salary levels for EAP and HCE exemptions and to establish a mechanism whereby the levels are automatically increased in the future.
September 4, 2015: Comment period ends. Over 270,000 comments were received by the DOL regarding the proposed changes.
Today: Currently awaiting the Final Rule which is expected by the end of July, 2016. The changes are expected to take effect sixty (60) days after the Final Rule is issued.
By all accounts, the expectation is that drastic changes will be made to the Salary Level test before the end of 2016. The current prediction is that the current salary of $455 per week will be increased to $970 per week. This means the lowest salary an exempt employee could earn would be in the ballpark of $50,440. What does this mean for employers?
Employers who have exempt employees earning around or less than $50,000 annually may be at serious risk.
Some steps employers can take now:
- Review the classifications and salary for all of your employees
- Determine which employees will lose an exempt status when the level increases
- Review and analyze hours worked to determine overtime liability; if you do not have complete time records for exempt employees, work to get that data quickly
- Considerations for employees in the grey zone: increase salary; reduce schedule to evaluate productivity and accurately assess the need for hiring; switch to non-exempt and pay overtime
Certainly there is a lot of strategic planning and investment to be done now to help employers seamlessly tread through the significant changes that are on the horizon. Even more certain is that documentation is more crucial now than ever. Be sure you have complete and accurate documentation to help to analyze and comply with the FLSA.