The Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) was signed into law by President Roosevelt in 1938 during the New Deal era. The Act established the 40 hour work week, with the intent being to spread employment and prevent over working employees, thereby improving employee health and spurring economic growth. Since its enactment, the Salary requirements have changed only seven times and never as drastically as what is now anticipated. Should the current proposed rule be finalized – which is likely to happen any day now – millions of employees throughout the United States may be automatically reclassified as non-exempt.
Here are the important facts:
The FLSA has been the single most expansive law affecting employers. Under the Act, employers who employ 1 or more employees or have revenue of at least $500,000 per year, or simply engage in interstate commerce are subject to the provisions of the FLSA. Provisions include documentation of and compensation for all hours worked, minimum wage payments, overtime after forty hours in a week and child labor protections. Section 541 of the Act does allow for exceptions, referred to as “exemptions” whereby employees performing certain duties can be exempted from the FLSA. Employers often apply the exemption criteria broadly and inaccurately. In fact, the misclassification of employees is the #1 target of wage and hour lawsuits and DOL investigations today.
Three part test:
The difficult aspect of misclassification cases is that often the analysis turns on the whether the duties the employee actually performs meet the exemption requirements. Under the Duties test, job titles are irrelevant. Employers have the burden of proving that the exemption applies whenever challenged. The idea behind exemptions is that the employee’s job is so important and the employee is compensated so well that government (FLSA) protection is not need. If that’s the case though, why are so many employees suing their employers?
Once again, the federal government has taken the initiative to protect employees and decrease misclassification abuse. Rather than focus on the complicated duties testes employed though, the Department of Labor has drafted a rule that increases the salary level for exempt employees to be equivalent to 40% of the weekly earnings for full time salaried workers in the lowest wage area of the United States – currently the South. Beginning December 1, 2016, to be exempt from the FLSA an employee must earn at least $913 per week. This more than double what the current weekly salary level is and will certainly have a resounding impact on businesses throughout United States. The Department of Labor anticipates that the increased threshold will immediately effect over 4 million workers and, over time, 11 million U.S. workers. The final rule was issued May 18, 2016 and will be effective December 1, 2016.
What should employers do today?
Employers essentially have four options:
- Increase the salary for exempt employees to meet the new threshold
- Reclassify employees to non-exempt and limit overtime
- Do nothing. Keep the current classifications and salaries, pay overtime over 40 hours based on the “Regular Rate”
- Reclassify and determine new compensation packages
Certainly, there is no clear ‘one method fits all’ answer to what employers should do. In fact, employers may even apply varying strategies to different employees. Let’s consider a hypothetical:
Meet Company Gen-e and employee Sally. Sally is currently an exempt employee paid a salary on a monthly basis. Sally earns $40,000 per year. She is compensated $4000 gross per month. As a member of the Human Resources department, Sally typically works about 38 -40 hours per week, but during open enrollment or busy payroll months, she sometimes works as much as 55-60 hours in a week.
Applying the above options, what should Gen-e do about Sally’s classification when the Final Rule is issued?
- Gen-e could raise Sally’s salary to (let’s go with round numbers) $48,000 and expect that she can stay exempt. If they do this, Gen-e should consider how to convey the raise to Sally without raising concerns by Sally that she was underpaid (which in essence she was, considering the government is requiring a higher threshold). Also, the company needs to consider if this is the most financially beneficial solution for them. If they have 10 employees who are in a similar financial solution, raising each of those employees from $40,000 to $48,000 is an $80,000 increased annual expense on the business.
- Gen-e could change Sally to non-exempt and limit her overtime. As a non-exempt employee, Gen-e will need to document Sally hours and pay her based on the hours worked. If the company wants to limit overtime, they ensure they have 1) clearly drafted policies regarding working hours and documentation 2) train employees on company procedures 3) train management to ensure the policies and procedures are enforced and 4) audit frequently. Furthermore, Gen-e may need to consider investment in workforce management solutions for efficient scheduling and tracking of hours. Finally, Gen-e must consider the ramifications of limiting Sally’s hours. It is likely that the company will need to hire more staff to ensure Sally’s job can still be fulfilled.
- Gen-e could decide to keep Sally’s salary at $40,000 and pay overtime in any week that Sally works over 40 hours. Technically, Sally would be classified as a “salaried non-exempt employee” (because if the Salary doesn’t hit the threshold the employee is automatically non-exempt – no if, ands or buts) and Gen-e needs to pay Sally “time and a half” of her regular rate of pay. To determine the regular rate of pay, Gen-e needs to take the total compensation for the week divided by the number of hours Sally worked. The computation and means of collecting the hours is extremely important. Employers need to understand how the law reads regarding overtime and be wary of applying the rules correctly. Further, with this option Gen-e must consider how they will accurately track Sally’s time and whether they have the infrastructure (time keeping solution) in place to comply with wage and hour regulations.
- Gen-e could reclassify Sally to non-exempt. This is probably the least risky and cleanest path, but Gen-e will need to consider a few key elements. First, what should Sally’s hourly rate of pay be? If the company knows that Sally works over time occasionally, they need to factor this into her total expected and intended compensation. Here is what Gen-e could expect to pay Sally:
Additionally, in any of the scenarios listed above, Gen-e must consider not only the financial implications of the FLSA Salary level increase, but business leaders should always consider the culture of its workforce and the impact a significant change can have on workers. Some employees feel that an exempt classification places the employee in a more autonomous role. A change to non-exempt could negatively affect the morale of employees who feel that the change is a demotion.As demonstrated, Gen-e must carefully review compensation packages and hours. One issue, though not specifically addressed in the hypothetical, is whether Gen-e has time records for Sally so that the company knows the real hours she works. Many employers do not track hours worked for exempt employees. Without knowing that Sally frequently has weeks where she works over 40 hours, Gen-e could set itself up for some real financial shock if it doesn’t begin tracking her hours immediately so that it can prepare its analysis with helpful and correct data.
Finally, the change to non-exempt – whether due to action or non-action – will certainly impose additional burdens on employers. Remember, the duty to record and maintain accurate time records is on the employer. Beyond the financial implications of additional or improved labor management solutions, companies need to consider state laws that govern the employer/employee relationship. A change in employee classification under the FLSA may trigger state requirements such as lunch and break rules, reporting time pay laws, and wage payment requirements, among others depending on the state. And, if the business has employees in many states, the burden on the employer to understand the legal requirements, document and comply is even more gruesome.
In sum, the DOL’s changes to the white collar exemptions will severely impact the labor force throughout the country. Employers must analyze, plan, and begin implementation now as December 1 is just around the corner. And, December 1 is a THURSDAY. If this does not perfectly align with your pay period, then implementation may be before December 1.
Documentation is key so that you can properly analyze your options regarding your workforce and any likely changes that will be implemented. Businesses need to audit employee classifications, review procedures and policies, and comply with the greatest change to the FLSA in decades.