On July 6, 2015, the Obama administration issued proposed changes to rules enforced by the Fair Labor Standards Administration (FLSA) which deal with the classifications of employees who are entitled to overtime pay for hours worked in excess of 40 per week. While these regulations are proposed, and comments from the public are currently being analyzed, employers should be aware of the impact that these changes will have on their businesses.
Currently effective provisions and the proposed regulation
Under current regulations, certain employees are exempt from the FLSA rules that require the payment of overtime to employees who work more than 40 hours in a workweek. To satisfy this exemption, the employee must be payed a minimum salary (the ‘salary level’) and perform certain types of duties that would be performed normally by executive, administrative or professional employees (the ‘duties’).
The salary level had not been adjusted since 2004, when it was set at $455 per week. The Obama administration is concerned that certain employees who are classified as exempt from overtime are working hours far in excess of 40 and are therefore earning far less than the minimum wage that would be paid to them if they were non-exempt, hourly employees.
The proposed regulation would adjust the salary level to $970 a week, effective in 2016, and would be subject to annual revisions based on either changes in a salary survey or the consumer price index. Indexing is necessary, according to the proposal, to assure that the salary level continues to make a meaningful test for distinguishing between exempt and non-exempt employees.
There were no changes to the duties that determine an employee’s exempt versus non-exempt status.
Impact on employers
Employers are not pleased with the proposed regulation. Among the issues that they have raised:
- This will significantly increase labor costs, as overtime pay will now need to be granted to employees who previously were not entitled to overtime.
- To offset potential increased labor costs, employers may reduce the base pay of previously salaried employees; in effect, the ‘guarantee’ of base pay will be diminished so that the total pay package, including overtime, will equal the prior base pay. This would add uncertainty to the weekly paycheck of the employees, and require the employer to maintain more detailed time records than in the past.
- The increase in the threshold, from $455 to $970 is too much too quickly. A more gradual rise would give employers time to adjust their methods of doing business and employee duties. For example, should a non-exempt manager (one making less than $970 a week) perform the same duties as an exempt manager (who is making more than $970)?
- Will the change in the salary result in fewer ‘white collar’ jobs being created—and reduce the ability of employees to move into management roles?
WorldatWork, a nonprofit association of compensation professionals, conducted a survey in July 2015 to gauge employers’ reactions to the proposal. Over 1,400 employers responded, representing a broad range of number of employees (less than 100 to over 100,000), types of organizations (41% public, 31% private, 28% nonprofit) in a wide range of industries. Among the responses, assuming that the proposals took effect:
- 73% felt that there would be more non-exempt employees
- 22% felt that there would be no change in the workplace flexibility rules
- 79% felt that there would be a negative effect on the morale of the reclassified employee
- 65% felt that the $970 salary level was too high
As stated above, these are proposed regulations. They would be effective in 2016. Employers should keep a close eye on developments in this area and be prepared to adjust their compensation programs to reflect the impact of the law.
We would be pleased to discuss issues related to compensation structures and the impact of the FLSA proposed regulations. For more information on this topic, contact our Compensation & Benefits Advisory Services Group at 440-449-6800.