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Sep 2015
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September 29, 2015

Complying with the DOL’s Proposed White Collar Exemption Rules


When this Article goes to press, the notice and comment period for the Department of Labor’s (DOL) proposed revisions to the “white collar” exemption rules will have closed. Barring an extension, we will be on our way to doing business under a significantly different set of rules.

The DOL has proposed only to raise the minimum salary threshold for a white collar employee to be considered exempt under the FLSA. The increase is substantial. The current salary threshold is $23,660 per year. The DOL is proposing to raise it to more than $51,000 annually. Many employers have expressed concern that it will not be feasible to raise the salary for some of their currently exempt employees high enough to meet the new threshold. Assuming that remains the case after the rules are finalized, those employers will need to decide how to deal with these employees who will then be non-exempt and entitled to overtime compensation. In theory, this does not sound that difficult, but in reality, there are many considerations that need to be taken into account. Some of those considerations include:
  • Keep paying the employee the same salary or divide that salary by 2,080 and then pay overtime for hours over 40. This may be the simplest approach. Although easy to implement, it does create a possibility that the employee could earn substantially more money if s/he works a considerable amount of overtime. Accordingly, the employer’s ability to control the number of hours worked is critical.
  • Lower the employee’s salary or set a lower hourly rate to account for overtime hours worked. Neither the current nor the proposed regulations prohibit an employer from reducing an employee’s pay. Under this approach, when overtime at time and one-half is taken into account, the employee would earn the same overall pay at the end of the week or the end of the year as s/he did before the rules change. The biggest challenge with this approach is whether the employer is able to accurately estimate the hours and the overtime that will be worked weekly, monthly or annually such that the employee neither earns significantly less nor significantly more than s/he did before. These differences will be magnified if there are several employees doing the same job. Also from a cash-flow perspective, it is important to know if the overtime is spread out evenly throughout the year or whether there are peaks and valleys. With time left before the new rules take effect, now may be a good time to begin tracking the hours the potentially affected employees will work.
  • Be sure to take other forms of compensation into account. If your newly non-exempt employees receive other forms of compensation (like commissions or non-discretionary bonuses), those also must be factored into the overtime calculation. Under DOL requirements, such payments must be allocated back over hours worked during the period in question. That incremental hourly amount must be included in the employee’s regular rate of pay for overtime purposes. While this sounds complicated, it really is just a math exercise. Employers who pay their current non-exempt employees things like safety bonuses, attendance bonuses or productivity bonuses have been (or should be) doing this. One way to avoid the after-the-fact math exercise is to pay bonuses as a percentage of the employee’s overall earnings (as that implicitly includes overtime pay).
The DOL left open the possibility that, in its final rules, the Agency might also modify the duties test for the exemptions. More than a few experts think that the Agency will do just that. If that happens, employers will have very little time (maybe only 60 days) to then evaluate whether employees who earn more than the minimum salary threshold do the right types of work to continue to fall within the exemptions.

Employers are well-advised to use the time between now and when the final rules take effect to evaluate their exempt jobs and update job descriptions. By doing so, employers will be ready to make the correct classification decisions and adjustments when the regulations are finalized. 

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