Employers have been bracing for the new "white collar" exemption rule, and now it’s here. The U.S. Department of Labor released its updated Fair Labor Standards Act "white collar" exemption rule last week. The new rule is scheduled to take effect December 1, giving employers more time than anticipated to plan for necessary changes.

The White House claims "the new rule is expected to extend overtime protections to 4.2 million more Americans who are not currently eligible under federal law, and it is expected to boost wages for workers by $12 billion over the next 10 years." And, on its website, the DOL suggests that affected employees not receiving more money will get more free time: "We have issued a final rule that will put more money in the pockets of middle class workers – or give them more free time."

FLSA white collar exemptions exclude certain categories of employees from federal minimum wage and overtime requirements. Currently, to qualify for one of these exemptions, employees generally must (1) be paid on a salary basis, receiving a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) be paid more than a specified salary threshold of $23,660, or $455 a week (“salary level test”); and (3) primarily perform certain executive, administrative, or professional duties as specified in DOL regulations (“duties test”).

In addition, certain highly compensated employees (HCEs) are currently exempt from FLSA overtime pay requirements if they are paid total annual compensation of at least $100,000, receive at least $455 per week, perform office or nonmanual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.

Here’s what’s changed. The new rule affects the salary level test, leaving the salary basis test and the duties test undisturbed. The new rule will raise the salary threshold from $23,660 to $47,476 a year, or from $455 to $913 a week. The threshold will be automatically updated every three years.  The updates will maintain the threshold at the 40th percentile of full-time salaried workers in the lowest income region of the country (currently the South).  According to the White House, “the threshold is expected to rise to more than $51,000 with the first update on Jan. 1, 2020.”  The HCE threshold will increase from $100,000 to $134,004, “above which only a minimal showing is needed to demonstrate an employee is not eligible for overtime.”

The White House, trying to put employers’ plight in a positive light, claims that “employers retain considerable flexibility in how they comply with the new rule, such as increasing salaries to at least the new threshold to keep positions that are primarily executive, administrative, or professional exempt from overtime pay; paying overtime for hours worked in excess of 40 in a week; or reducing overtime hours.”

The DOL claims that it responded to “employers’ concerns by making no changes to the ‘duties test’ and allowing bonuses and incentive payments to count toward up to 10 percent of the new salary level.”

The Need for Affected Employers to Assess and Act

So what’s the big deal? The new rule will knock millions of people out of the white collar exemption, making them eligible to receive overtime pay – unless their employers have increased their salaries above the new salary threshold.

In response to an elevated threshold, most employers likely will, by economic necessity, resort to strategies designed to keep labor costs static. Options for current exempt employees with salaries less than the new threshold include:

–Increase salaries to meet or exceed the new $47,476 threshold

–Keep employees at their current salaries but pay them for overtime worked (and perhaps preclude significant overtime).

–Change salaried employees to hourly and pay them overtime for work over 40 hours per week

–Redistribute work and staffing levels between employees to limit worker’s hours to 40 per week

Retail, hospitality, restaurant and other employers that currently have a significant number of salaried exempt employees under the new threshold may want to focus on what needs to be done by December 1:

–Collect and assess data and position information for:
    –all currently exempt employees who make up to $47,476
    –those exempt as HCEs

–Assess contracts and policies tied to particular employees and positions

–Identify all factors that will accompany the change to nonexempt status (including modifications to paid time off, vacation, and benefit plans)

–Determine the best strategy for the business (e.g., increase salaries? convert to hourly with overtime? control overtime? realign duties?)

–Develop and implement a roll-out strategy 

The scheduled effective date of December 1 sounds like a long way off, particularly since we are at the start of summer.  However, employers that still need to collect and assess data before making tailored decisions do not have much time to waste.

Kathleen Anderson is a partner at Barnes & Thornburg.

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