Employers To Reevaluate Their Exempt Employee Classifications

The U.S. Department of Labor is expected to soon issue a final rule that will make significant changes to the requirements for classifying “white collar” employees as “exempt” under the Fair Labor Standards Act. This rule will impact millions of employees who are currently classified as exempt, requiring employers to either raise the employees’ salaries or begin paying them overtime and tracking the time that they work.

Under current law, to be classified as an exempt white collar employee under the executive, administrative, or professional exemptions, an employee must meet three essential requirements: (1) satisfy a “duties test” (i.e., have and perform certain white collar job duties); (2) be paid on a salary or fee basis (as opposed to an hourly basis); and (3) be paid at least $455 per week. If an employee is “highly compensated,” meaning that he or she earns at least $100,000 in total annual compensation, the employee may also be considered exempt under a relaxed version of the duties test.

On July 6, 2015, DOL issued a proposed rule that would change the dollar thresholds necessary to be exempt under the white collar and highly-compensated employee exemptions. The proposed rule would make three major changes:

1.Salary Basis: The salary level necessary to be exempt would rise from $455 per week (or $23,660 per year) to equal the 40th percentile of earnings for full-time salaried workers, which is projected to be approximately $970 per week (or $50,440 per year) in 2016.

2. Highly Compensated Employees: The total annual compensation required for an employee to qualify as a “highly compensated employee” would rise from the current level of $100,000 per year to equal the 90th percentile of earnings for full-time salaried workers, which is projected to be approximately $122,138 per year in 2016.

3. Automatic Updating: The above dollar levels would automatically update every year. The change would be based either on maintaining the compensation level at a certain percentile of earnings in the workforce, or tying the compensation level to inflation.

DOL is expected to release a final rule implementing these changes in the spring or summer of 2016, with an effective date of only 60 days after the date of publication. If promulgated as proposed, the final rule will have two major impacts:

  • Employees who earn less than approximately $50,440 per year will no longer be eligible for the white collar exemption (even if they are presently classified as exempt) unless their salary is increased.
  • Employees who earn less than approximately $122,138 per year will no longer be eligible for the highly compensated exemption unless their salary is increased.

DOL anticipates that the new rule will impact millions of workers.

Employers should take the following steps now to prepare for the expected rule:

  • Identify all employees potentially impacted by the rule (i.e., employees currently classified as exempt under a white collar exemption who earn less than the salary thresholds).
  • Determine what action to take with respect to each affected employee, such as whether to reclassify the employee as nonexempt, raise the employee’s salary to maintain exempt status, consider whether the employee qualifies for another FLSA exemption that does not require the employee to meet the new salary basis requirement (such as the hourly computer professional exemption), or conduct restructuring or reassignment of work.
  • Consider whether to allow or adjust flexible or remote work schedules for exempt employees who become nonexempt, including whether to allow such employees to maintain use of a company cell phone or remote e-mail/network access. Remote working can raise substantial complications under the FLSA, such as requiring an employer to pay for the time an employee spends responding to e-mails at night (even if the employee is not asked to do so), which can create unexpected overtime payment obligations.
  • Consider whether to adjust fringe benefits to take into account increased payroll costs imposed by the new rule.
  • If adjusting salaries or benefits, conducting layoffs, or taking related action as a result of the rule, ensure that all actions are nondiscriminatory and otherwise comply with applicable legal requirements, including providing WARN Act notices and complying with the release requirements under the Age Discrimination in Employment Act.
  • Consider conducting a comprehensive wage and hour audit to correct any current FLSA misclassification issues.
  • Conduct training for newly-nonexempt employees to explain their obligation to track their hours worked and your expectations for working (or not working) overtime.

Employers also should watch carefully for DOL’s release of the final rule, which may make additional changes not contained in the proposed rule, such as modifications to the duties test. Employers also need to consider their obligations under state wage and hour law which may differ from and impose additional requirements not included in the FLSA.

For more information about the new rule or its expected impacts or any other legal issues in the workplace, contact the authors of this article or the Hogan Lovells lawyer with whom you work.