In May, the federal Department of Labor (DOL) issued updated Fair Labor Standards Act (FLSA) overtime regulations, causing many employers to revisit their employee classifications before the final rules go into effect this December 1. While most aspects of the rules remain the same, the change that will affect the most employers is a substantial increase in the minimum salary level required for an employee to qualify as exempt from overtime rules. Currently, employees who make at least $455 per week ($23,660 per year) are exempt from the minimum wage and overtime rules as long as they qualify under a 'duties' test and are paid on a salary basis. The new rules increase the minimum salary level by over 100%, to a new minimum of $913 per week ($47,476 per year). Many employers now face the same decision: what to do with their currently exempt employees who make less than $913 per week. While the new changes will not affect employers that already meet the new salary level, the notoriously tricky rules under the 'duties' test present continued compliance issues for many employers. This article details the new changes to the overtime rules, analyzes their impact on Oregon employers, and describes why employers should consider auditing themselves for broader compliance with the exemption rules before December 1.
I. Overview of FLSA Changes Effective December 1, 2016
Under existing law, employees who have certain duties that are primarily administrative, executive, or professional qualify as exempt from timekeeping, minimum wage, and overtime rules if they are paid a minimum salary level on a salary basis. The new regulations will not change the types of employees or duties that can qualify as exempt. But the new regulations do include changes to the other two aspects of the exemption test; that is, the salary level and salary basis requirements.
First, the new rules will raise the salary level threshold from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). The DOL first considered raising the threshold to over $50,000 per year, basing that figure on the 40th percentile of overall earnings for full-time salaried workers in the U.S. After some pushback from employers that found this figure to be unpractical, however, the DOL settled on the lower rate, which reflects the 40th percentile of earnings of full-time workers in the lowest-wage census region of the U.S. Although lower than the initial figure, the $913 per week requirement still represents a substantial increase of over 100% from the salary threshold under the current rules.
Second, the DOL increased the salary threshold for another FLSA exemption category: 'Highly Compensated Employees.' Under this exemption, certain employees may be treated as exempt under a relaxed duties test if they make at least $100,000 per year. The new regulations increase that amount to $134,004 per year, a figure representing the 90th percentile of full-time salaried workers nationwide. Oregon employers, however, should disregard this change. Because there is no similar exemption under Oregon law for highly compensated employees, Oregon employers must make sure their employees meet one of the other exemption categories to be compliant with both the FLSA and Oregon law.
Third, the final rules provide for automatic updates of the salary level every three years using the same metrics noted above (e.g., 40th percentile of salaries in the lowest-wage region for administrative, executive, and professional employees). The first increase following the final rules will occur on January 1, 2020. The DOL will publish notice of the new updated threshold levels at least 150 days before the updates will take effect, but current projections anticipate the salary level for administrative, executive, and professional employees will increase to at least $51,000 per year in 2020. The Department originally considered increasing the salary level every year, but adopted the three-year automatic increase in response to commenters' concerns about the burdens associated with implementing a yearly increase.
Fourth, the new regulations make one change to the salary basis test. Currently, bonuses and commissions received by employees may not be counted in reaching the salary threshold. The new rules will now permit employers to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the required salary level if employers pay those amounts on a quarterly or more frequent basis. The requirement of quarterly payments represents a departure from the DOL’s initial proposal, which proposed requiring payments on a monthly or more frequent basis. The Final Rule also allows employers to make a 'catch-up' payment at the end of each quarter to the extent the bonuses, incentives, and commissions fell short of the amount required to reach the salary threshold.
II. Impact of the FLSA Changes on Oregon Employers
What do these changes mean for Oregon employers? As mentioned above, the change to the 'Highly Compensated Employees' exemption will be of no consequence in Oregon. In contrast, the new salary levels for administrative, executive, and professional employees are estimated to alter the exemption status of 46,019 Oregon workers if they do not receive pay increases before December 1, a figure that represents 3% of all Oregon employees to whom the FLSA applies. Accordingly, for employers of those 46,019 employees, they will need to decide whether to make adjustments before December 1 to maintain their employees’ exempt status, or start tracking these employees’ hours and paying them overtime.
Oregon employers should also note that while the FLSA requirements are changing, the state of Oregon has not yet acted to change any exemption rules under state law.
III. Options and Opportunities for FLSA Compliance
Employers have several options for responding to the new regulations. For each affected employee, employers may choose to adopt one or a combination of the following approaches:
1. Retain the exempt status of an employee who meets the duties test by increasing their salary to at least the new salary level;
2. Change the status of employees who do not meet the new salary level to nonexempt, begin tracking those employees’ hours, and pay an overtime premium of one and a half times an employee's regular rate of pay for any overtime hours the employee works;
3. Change the status of employees who do not meet the new salary level to nonexempt while keeping down costs by (a) adjusting wages and schedules to reallocate employee compensation between regular wages and overtime such that the total cost to the employer remains the same, and/or (b) reducing or eliminating overtime hours by adjusting workload or hiring new employees.
Employers should start by determining which, if any, of their currently exempt employees will become nonexempt in December due to the rule changes. In deciding on the most efficient approach to comply with the new rules, employers should consider the circumstances of each affected employee and calculate the costs of the different approaches in each case. Relevant considerations include how much the employee is currently paid and how many hours he or she is expected to work per week.
While the DOL has not been focusing on enforcement of the current rule for the time being, enforcement efforts as well as audits are expected to ramp up in the weeks and months after the new rules go into effect. The current rule change gives employers an opportunity to make sure they are in compliance and prepare themselves for enforcement whether or not the new salary rules affect them. Importantly, when the DOL investigates an employer for violations of the salary basis rules, the investigation will expand into the duties aspect of the exemption rules, and can further expand to other areas of the FLSA. To best prepare themselves, employers should consider conducting internal FLSA audits to broadly test themselves for compliance before the new rules go into effect on December 1, 2016. The FLSA exemption rules, particularly the ones relating to the duties test, are notoriously difficult to apply, and many legal professionals believe that most employers unknowingly suffer from one or more current violations. While the new rule changes do not affect the duties test, employers now have a unique opportunity to audit themselves for overall compliance before the expected uptick in enforcement of the exemption rules later this year.
If you have any questions about the new regulations or the FLSA in general, or would like the assistance of an attorney in evaluating your employee’s exempt status or conducting an internal FLSA audit, you can contact one of the employment law experts at Gleaves Swearingen by calling 541-686-8833. We look forward to helping you comply with the FLSA.
Karianne Conway is an employment law attorney with the law firm Gleaves Swearingen LLP. If you have any questions regarding this article, she can be reached at 541-686-8833 or email@example.com.
DISCLAIMER: The information in this article is offered for general information and educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship. You should not act on the information in this article before seeking the advice of an attorney.