© 2016 The Texas Lawbook.
By Michael V. Abcarian
(May 31) – In a long-simmering cauldron of controversy, the U.S. Department of Labor (DOL) finalized its highly controversial FLSA overtime pay exemption rules on May 18. The changes increase the minimum salary required for the application of the so-called “white collar exemptions” from the FLSA’s overtime pay requirements by a staggering 101 percent. These overtime exemptions are typically applied to executive, administrative and professional employees.
What does this mean for Texas employers? Texas employers will have to reevaluate the classifications of 1.2 million employees, according to the Economic Policy Institute (EPI). The increased costs associated with this new pay matrix have the potential to reshape the workplace landscape as the new rules raise the minimum salary required for overtime exemptions from $23,660 to $47,476.
Though many believe that the previous salary threshold was unrealistically low, others argue that the increase should have been accomplished via tiered increases rolled out over a multi-year period of time. Unfortunately, employers will be forced to comply with dramatic increases in less than a year.
The final rule requires:
• Annual salaries of overtime exempt employees to increase to $47,476 from $23,660, a 101 percent increase, in order to maintain exempt status. The rule does allow employers to count nondiscretionary bonuses and other incentives that are paid on at least a quarterly basis — such as commissions — to count toward 10 percent of the required minimum salary;
• The minimum annual salary for “highly compensated employees,” those who only need to meet an abbreviated duties test under one of the white collar exemptions, must be at least $134,004 — a 34 percent increase from the current annual salary requirement of $100,000;
• Automatic increases to the salary levels every three years beginning January 1, 2020.
Fortunately for employers, the DOL did not make changes to the white collar duties tests, so employers do not need to make adjustments there — provided that they have correctly categorized all employees currently treated as overtime pay-exempt. However, it is wise to take time now to ensure all overtime pay-exempt employees do in fact qualify under the current FLSA White Collar duty test regulations.
These sweeping changes present immense challenges for virtually all employers and all industries because almost all will be required to comply. As you might imagine, compliance might be especially burdensome for nonprofits and industries that historically employ low-wage managers such as in the retail, hospitality and construction sectors. However, these changes also will have a profound impact on other sectors, ranging from higher education institutions to the golf and tennis industries.
Industry aside, general counsel must work with employers now to prepare for the Dec. 1 implementation date of these new rules, which may be all the more difficult for those whose 2016 budgets are already set. Performing internal audits to determine which employees will be affected and the potential cost to the employer are critical first steps. Then, general counsel and employers should sit down to determine how best to comply with the broad compensation changes they must consider. It may be beneficial to include outside employment counsel versed in FLSA compliance for this part of the project.
It is important to evaluate all available compliance options, given that it is unlikely many employers will choose to simply shoulder the burden of raising the salary of every exempt employee currently earning less than $47,476. The good news is that employers have several options to consider in planning their pay structure going forward.
Here are some of the broad-based options that employers might consider:
1. Give Raises. If currently exempt employees’ salaries are near the new minimum, it may be feasible to simply meet the new annual salary minimum. For example, if those employees are currently earning $45,000 a year, it may be easier for the employer to bump them up to $47,476 a year, rather than make some other, more drastic change.
2. Pay Overtime. Employers may choose to convert lower-paid salaried employees to a non-exempt (usually hourly) status and pay them for overtime hours worked. In this scenario, employers may require employees to obtain management approval before working overtime hours in order to keep costs down. But remember, if employers use this methodology, they still have to pay for all time worked, even if employees violate the rules. Employers cannot refuse to pay non-exempt employees for time actually worked.
3. Adjust Hours and Hire. Companies may decide to reduce current employees’ hours so that they do not work more than 40 in a week and hire additional employees to perform the extra work required in order to avoid overtime pay costs. However, this can be a complicated balancing act.
4. Change the Workweek. Employers may decide to change the workweek measuring period. This might work for employers whose employees work a number of consecutive days and then are off for several days. For example, if employees work 12 hours for seven days, then are off for seven, the employer may save money by establishing a Thursday through Wednesday workweek rather than a Monday through Sunday workweek. However, changes in the workweek should not happen more than once in response to the new DOL pay rule.
Texas employers are in the eye of the storm as they prepare for compliance with these new pay rules. Now is the time for planning to ensure that all employees will be properly paid, while the employer retains its competitive edge in the marketplace. This will be no small task for most Texas employers.
Michael V. Abcarian is the managing partner of the Dallas office of Fisher & Phillips, a national labor and employment law firm representing management. He has extensive experience advising and defending employers in all phases of labor and employment matters, including defense of lawsuits across the country, matters before the DOL, and preventive auditing and planning that can reduce the employer’s legal risks and liabilities in work-related matters. You can reach Michael at mabcarian@fisherphillips.com.
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