We want to alert you to a proposed change in federal wage law that would impact how employers compensate their employees.  This email describes the proposed change and addresses some of the implications for employers.  

Introduction and Summary
In an anticipated move, the U.S. Department of Labor announced proposed changes to federal overtime pay regulations that would greatly increase the number of employees who must be paid overtime.  The proposed regulations have three key changes to federal overtime law.  First, the weekly salary minimum required to qualify for the so-called “white collar” exemptions under the federal Fair Labor Standards Act (“FLSA”) would increase from $455/week to $921/week.  Second, the proposed regulation would increase the annual compensation requirement to qualify under the FLSA’s highly compensated employee exemption from $100,000 to $122,148.  Third, the proposed regulation would create a mechanism to automatically update the salary and compensation levels without requiring changes to the regulations.  These regulations will require employers to re-evaluate their pay practices for employees, including managers, previously treated as exempt from overtime but who earned less than $921 per week.  

Background
The FLSA is the federal law that governs federal overtime and minimum wage requirements.  While there is a presumption that employees are entitled to overtime pay for all hours worked over 40 in a week, the FLSA provides exemptions from this requirement if certain conditions are met.  Currently, under the executive, administrative, and professional exemptions, employees are exempt from federal overtime requirements if they:  (1) are salaried, meaning they are paid a predetermined and fixed salary not subject to reduction because of variations in the quantity or quality of their work; (2) are paid more than the salary threshold of $455/week ($23,660/year); and (3) primarily perform executive, administrative, or professional duties as provided in DOL regulations and courts’ interpretations of those regulations.  The FLSA also provides a highly compensated employee exemption, which exempts from the law’s overtime requirement employees who have an annual salary of $100,000 or greater (including a minimum of $455/week), whose primary duty includes performing office or non-manual work, and who customarily and regularly perform at least one of the exempt duties of a “white collar” exempt employee.”  The salary minimum was last adjusted in 2004 and since then there have been no changes to account for inflation or other market conditions.  As a result, the Obama Administration directed the DOL to consider making certain changes to the wage and hour regulations to protect employees and update the regulations.  On June 30, the DOL disclosed its proposed regulations.       

The proposed regulations’ most significant change is increasing the salary threshold for the “white collar” exemptions.  By the DOL’s estimate, this change will have the effect in the first year of affecting 4.6 million workers whose salaries are currently between $455 and $921 per week.  These employees most likely would need to be reclassified as overtime eligible and paid based on their hours worked, which will create several issues for employers identified below.  Similarly, employers who relied upon the highly compensated exemption for certain employees earning between $100,000 and $122,148 will potentially need to treat these employees as overtime eligible under the proposed regulations.  Finally, in what has the potential to create ongoing challenges for employers, the DOL proposes to be able to automatically update the salary level for the exemptions such that employers may have to adjust their classifications based on increases to the salary minimums.  

Although not part of the proposed regulations, the DOL is also soliciting comments on other wage and hour issues, including the use of nondiscretionary bonuses to satisfy a portion of the salary requirement and the adequacy of the current duties tests.  Of potential concern to employers is the possibility that the DOL is seeking to discreetly change the duties which employees must primarily perform to qualify for a white collar exemption without first identifying the intended changes before the comment period.
 
Implications for Employers
The proposed regulations will not take effect until after the public comment period.  Until the regulations are enacted, these proposals do not create new or  immediate obligations for employers.  While the comment period can take several months to a year and the final regulations may differ from the current proposal, employers, nonetheless, should use this period to evaluate their pay practices for employees who would be affected by the new regulations.  Some issues to consider are:

• Employers will need to prepare to convert these employees to overtime eligible, non-exempt status.  In order to minimize the additional expense related to this conversion and to keep the total compensation approximate to the current salary, employers will want to evaluate the number of hours these employees work, the consistency of those hours, and how those hours can be accurately tracked and recorded.  As budgets are prepared, employers will want to take into account increased labor costs caused by the regulation.   

• Employers dealing with a workforce not accustomed to tracking employee hours will have to implement processes and practices that track hours in order to accurately compensate newly-hourly employees.  Employers will also have to prepare the affected employees for the conversion to non-exempt status.  Many exempt employees take pride in being salaried and professional, and these employees may resent and resist keeping track of hours worked.  The responsibility to pay employees for all hours worked rests with the employer, even where the employee does not want to report all hours worked, and employee resistance to proper recording practices can result in overtime liability.  

• For employees whose salaried compensation is close to the revised federal minimum to qualify for the exemption, employers may want to consider whether an increase in compensation to meet the new minimum is a better course than re-classifying the employee as non-exempt.

• Employers should evaluate the duties actually performed by their employees to determine whether they may qualify for another exemption without a minimum salary requirement or whether some changes to their job duties might qualify them for such an exemption.     

• Employers should remember that states have wage and hour laws that may differ from the FLSA, and be mindful to be in compliance with state law requirements in addition to the FLSA.   

We anticipate that the new regulations will put the focus on employers’ pay practices, both going forward and as currently administered.  The DOL and class action plaintiffs’ law firms will be monitoring employers for non-compliance with the revised regulations, and we will likely see an increase both in private lawsuits and government enforcement actions or audits.      

Contacts
If you have any questions or would like more information on the issues discussed in this email, please contact any of the following Klehr Harrison lawyers:  Jonathan Krause at 215.569.4496 jkrause@klehr.com or Lee Moylan at 215.569.4140 lmoylan@klehr.com.