“Ask Sheila” Column

Dear Sheila,

I am the HR Manager for a large city. We have a number of supervisors who earn $30,000 a year and perform duties that qualify for the executive exemption from overtime under the Fair Labor Standards Act. For years, I have been hearing about potential changes to the minimum salary for the overtime exemptions and even went so far as to begin reclassifying these workers during the 2016 proposed rule change under the Obama Administration, until that proposal was withdrawn. Now I hear there is a new proposed rule change. Are the rules finally changing? If so, what are the major revisions I need to be aware of? Will our supervisors still qualify for the executive exemption?

Sincerely,

Crying Wolf or Overhauling Overtime?

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Dear Crying Wolf or Overhauling Overtime?:

On March 7, 2019, the United States Department of Labor (DOL) published its latest version of the Fair Labor Standards Act’s (FLSA) overtime rules in the Federal Register. The 60-day public comment period is underway, after which time, the DOL’s Wage and Hour Division (WHD) can make additional changes or issue a Final Rule. With the proposed rules steadily moving through the administrative rulemaking process, the WHD has stated that it anticipates the new overtime provisions taking effect in January 2020.

As you know, the FLSA requires that covered, non-exempt workers are paid overtime—one and a half times their regular rate of pay—for all time worked in excess of 40 hours within any given seven-day work week (with some work period differences for police and fire). When classifying workers as either exempt or non-exempt from overtime requirements, an employer must first determine whether an employee is paid on a salaried, and not hourly basis, and meets the salary minimum to be considered exempt under the FLSA’s executive, administrative and professional exemptions, also known collectively as the “white collar exemptions”.

The proposed DOL overtime rules increase the minimum salary threshold for the white collar exemptions from $23,660 ($455 per week) to $35,308 a year ($679 per week). The proposed rules also allow employers to count certain nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the minimum salary threshold. This means employers need to look both at an employee’s yearly salary and any objective payments when determining their classification under the overtime rules. Additionally, the proposed rules permit an employer to make a catch-up payment at the end of the year to bring an employee up to the minimum salary threshold.

The proposed rule also increases the salary threshold for the Highly Compensated Employee (HCE) exemption from $100,000 to $147,414 per year. Employees who qualify under the HCE exemption are subject to a less stringent duties test.

One element missing from the new proposed rule is an automatic increase of the minimum salary threshold to account for inflation—a provision that was included in the 2016 Obama rule. Instead, the WHD has included an intention to review and update the salary minimum every four years using the formal rulemaking process.

The proposed rules do not change the second hurdle in qualifying for a white collar exemption: the duties test. Even if an employee’s yearly earnings meet the new minimum salary threshold, an employee’s duties must still meet the other requirements of the various white collar exemptions, and the employee must be paid on a salaried basis not subject to deduction except as permitted by the DOL’s Regulations.

As a reminder, the new overtime rules are vulnerable to judicial challenge. Remember, the U.S. District Court for the Eastern District of Texas invalidated the 2016 Obama Administration rules, holding that the DOL exceeded its statutory authority when setting the salary at an unreasonably high threshold (then $47,476 – more than double the current level). This time, however, the DOL took a compromise position by seeking a less drastic increase.

Despite a potential challenge in the courts, some level of change to the overtime rules is expected. The current overtime rules have not been updated since 2004, and there is consensus on both sides of the aisle that an increase in the minimum threshold is necessary to reflect current economics. It appears more likely this time that the proposed rule will become final.

With this in mind, we advise that you start to prepare now for these changes so that you can make salary or classification changes as soon as the new rule takes effect. Hopefully, we will know for sure before the summer budget process.

The first priority should be to review all positions with minimum pay grades below $679/week that are currently classified as exempt. Under the new proposed rules, your supervisors earning $30,000 a year will no longer meet the minimum salary threshold to qualify for the executive exemption. You can either plan to increase their salary to meet the new minimum of $35,308, or reclassify the positions to non-exempt. For positions with a salary that is already close to the new minimum, a salary raise may be the best option. However, for lower-paid positions, or where overtime is rarely required, reclassification may make the most economic sense. For reclassified positions that do require overtime, consider an hourly rate that, including anticipated overtime, is comparable to current compensation.

You should also be ready to update the city’s policies and procedures to reflect these new standards. If you decide to reclassify employees to non-exempt status, the city should conduct training on non-exempt-specific practices such as accurate timekeeping, flexing time in the same workweek to minimize overtime, the use of comp time (for public-sector employers), and travel time rules.

Ensuring that you have properly classified all of your employees is critical. If you fail to properly classify your employees, you can be liable for two to three years’ worth of back wages at 1.5 times the hourly rate, as well as liquidated damages in an amount equal to the unpaid overtime. Quick reclassification after the anticipated rule change should minimize the risk of back wage liability.

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“Ask Sheila” is prepared by Sheila Gladstone, Chair of the Firm’s Employment Practice Group. If you would like additional information or have questions related to this article or other matters, please contact Sheila at 512.322.5863 or sgladstone@lglawfirm.com.