We last wrote about the expected increases in to the minimum exemption salaries in our blog post from July 14, 2015. Since that time, the increases have not been enacted, but are getting closer.
The DOL has proposed new regulations increasing the salary basis applicable to exempt employees under the FLSA, as well as highly compensated employees under the FLSA. Both types of employees would be exempt from overtime requirements, if the duties tests applicable to their exemption are met and they are paid, on a salary basis, the new (and significantly greater) amounts proposed.
For the executive, administrative and professional (“EAP”) employees, the salary amount is expected to increase from $455 a week to $970 a week, if the new amount goes into effect in 2016. This figure represents the 40th percentile of weekly earnings for full-time salaried workers in the USA. According to the DOL, this figure will minimize the risk that employees will be misclassified, and potentially exempted, based on the salaries they receive.
The “highly-compensated” exemption (“HCE”) currently requires employers to pay a salary of over $100,000 annually which is in line to be increased to $122,148 annually.
The DOL is also proposing a mechanism to automatically update these salary levels going forward to ensure that they continue to provide useful and effective benchmarks for exemption.
Where Are We Now?
Last month, the DOL submitted its final rule on the overtime exemptions to the White House’s Office of Management and Budget for review — typically the final step before the rule is made public with an effective date.
Legislation has been introduced in both branches of Congress (H.R. 4773 and S. 2707) to put a stop to the DOL’s final rule. The bill is called the Protecting Workplace Advancement and Opportunity Act. It would require the DOL to conduct a comprehensive economic analysis on the effect the overtime regulation changes would have on small businesses, nonprofits and public employers before it is officially on the books. If passed, the bill could potentially push the DOL’s final rule far enough into the future that it would be at the mercy of the next Congress and President.
Where Are We Going and What Should We Do?
Assuming the final rule becomes law, there are some issues for employers to consider as they plan on implementing the new requirements.
Nondiscretionary Bonuses May Be Included in Salary Level Requirement
In the past, the DOL has not included nondiscretionary bonus payments when determining whether an employee’s salary meets the white collar exemption threshold; it looked only at actual salary or fee payments made to employees. In its proposed rules, the DOL sought input on whether it should permit some amount of nondiscretionary bonuses and incentive payments to count toward a portion of the salary level requirement for the EAP exemptions. The DOL stated that for these bonuses or incentive payments to count toward the weekly salary requirement, the bonuses and incentive payments would need to be paid monthly or more frequently, not as a yearly “catch-up” payment.
The DOL emphasized that it believes it is important to strictly limit the amount of the salary requirement that could be satisfied through the payment of nondiscretionary bonuses and incentive pay and is considering whether 10% of the salary requirement is an appropriate level. “The Department recognizes that some businesses pay significantly larger bonuses and where larger bonuses are paid, the amount attributable toward the EAP standard salary requirement would be capped at 10 percent of the salary level if such a provision were adopted.” The DOL also stated that the time period over which such payments are made must be considered and envisions that, in order for a business to take a credit toward the weekly salary requirement, the bonus would need to be paid monthly or more frequently. The DOL is not considering an annual catch-up payment for the EAP exemptions, as is allowed when calculating the total annual compensation for the HCE.
In response to the DOL’s proposal, employers who pay bonuses or other supplemental forms of compensation to their salaried exempt employees should be taking the following steps:
- Identifying which of their currently exempt EAP employees will no longer meet the exemption requirements based on the anticipated new salary threshold if changes are not made to their salaries.
- Analyzing what percentage of those employees would meet the annual EAP compensation threshold if all nondiscretionary bonuses were counted toward the salary requirements.
- Analyzing how those figures would change, i.e., what percentage of those employees would meet the annual EAP compensation threshold, if only nondiscretionary bonuses paid on a monthly or more frequent basis were counted toward the salary requirements.
- Analyzing how those figures would change, i.e., what percentage of those employees would meet the annual EAP compensation threshold, if only 10 percent of the salary requirement could be met through the payment of nondiscretionary bonuses.
- Identifying commissions and other forms of compensation being paid that are not referred to as “bonuses,” but which are similar in nature to bonuses, and determine how the inclusion of these payments would impact the described analysis.
There are not too many alternatives to consider in terms of dealing with the new salary requirements. Employers can consider raising the salary of those employees who meet the EAP job duties tests to the new higher amount. With respect to bonuses and other forms of compensation that do not currently count toward salary requirements, employers will need to consider adjusting their compensation programs so that a higher percentage of an exempt employee’s income will be in the form of a guaranteed salary, in the new amounts, and less (if any) will be in the form of discretionary bonuses and the like. Doing so would permit a shifting of an employee’s compensation to put more in the salary bucket and less in the bonus bucket, perhaps ending up at the same number that was previously comprised of salary at the previous amount and bonus, except that the amount of at least $970 would now need to paid as a salary.
The other alternative would be to not increase the employee’s compensation so as to pay them $970 a week in salary, and to make them non-exempt. Obviously, this means they will be eligible for overtime, at the rate of time and a half. Also, if these non-exempt employees were eligible for a nondiscretionary bonus, employers would need to be careful because where non-exempt employees are entitled to bonuses, their bonus rate of pay is factored into their overtime rate of pay. In other words, if an employee who receives nondiscretionary bonuses is not exempt from the overtime rules, an employer must take into account those bonuses and the weeks to which they may be attributable when calculating overtime. This is not necessarily a simple or straightforward process, particularly in situations in which employees are paid every two weeks and bonuses are based on monthly performance metrics. Employers who decide to convert certain employees’ status to non-exempt in response to the proposed regulatory changes need to take this into account when revising pay plans as part of the conversion process.
It appears that a push is on to get the new salary requirements in place before President Obama’s term is over. Given the fits and starts of the process to date, it remains to be seen whether this will be accomplished.