On March 15, the U.S. Department of Labor sent its final rule expanding overtime eligibility for millions of workers to the Office of Management and Budget, which is the final step before the rule becomes official in the next few months. The most notable change in the DOL’s proposed FLSA rules is an increase in the minimum weekly salary to the 40th percentile of weekly earnings for full-time salaried workers, based on data maintained by the Bureau of Labor Statistics.
The DOL projects that the 2016 level will increase to $970 per week (or $50,440 per year). For highly compensated employees, the threshold would be set to the annualized value of the 90th percentile of earnings for full-time salaried workers, or $122,148 annually. More importantly, for the first time in the FLSA’s history, the salary and compensation levels would be indexed to this BLS data and updated annually, without the need to go through further rulemaking. That would almost certainly catch many employers off guard. The DOL is also considering whether non-discretionary bonuses, incentive payments and commissions may be allowed to satisfy a portion of the salary level test.
So, what should employers do right now? There are several options:
- Do nothing other than get ready to start paying overtime to employees who are currently exempt but whose weekly earnings are below the 40th percentile of weekly earnings for full-time salaried workers.
- Limit the amount of overtime allowed for currently exempt employees who may no longer qualify as exempt. The downside to this, however, is that limiting the hours of current workers, while it will control overtime, may result in having to hire more workers.
- Increase the salaries of employees who are currently exempt but who are below the 40th percentile of weekly earnings for full-time salaried workers so that their new salaries are at least at the level needed to continue to be exempt.
- Reclassify currently exempt salaried employees who are below the 40th percentile of weekly earnings for full-time salaried workers to hourly non-exempt status. Then, set their hourly wage rate at a level that will result in essentially the same income they make now, after taking into account the number of hours they work and the overtime that will have to be paid.
Whether an employer chooses one of these options or some other one, it should perform an audit of its employee classifications and job descriptions. (In fact, employers should regularly do that anyway.) It is critical that job descriptions accurately describe the duties performed by someone in the position. Likewise, if someone is classified as an independent contractor, the employer must ensure that they aren’t actually a misclassified employee. Finally, because there is a chance that the DOL will modify the primary-duty test for exempt employees, the audit should examine whether some of the non-exempt duties currently being performed by ostensibly exempt employees can be reassigned to non-exempt employees. If so, remember to revise job descriptions accordingly.