UPDATED 11/18/15 – DOL Indicates That New White Collar Exemption
Overtime Rule May Not Go Into Effect Until Late 2016
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Brandon: Welcome to the HR for Small Business podcast, my name is Brandon Laws. I have a special guest with us, Dan Grinfas. He is with Buchanan Angeli and he is an employment law attorney and we are here to talk about the new proposed Fair Labor Standards Act that the Department of Labor proposed recently. So Dan, welcome, for one!
Dan: Well thanks for having me, it’s great to be with you!
Brandon: Could you give our listeners a sense for the timeline and history of when these changes were announced in the first place and then when they’re supposed to take effect?
Dan: Absolutely. Let me start out by first giving a really big picture of what these rules are. These are the U.S. Department of Labor FLSA Fair Labor Standards Act rules. And what the DOL is planning to do is to more than double the minimum salary for white collar exempt employees from the current $455 a week to a projected figure of $970 a week in 2016. So that’s a big change and it’s the first time in 11 years since they’ve changed it. And they’re also planning to raise the minimum salary for highly compensated employees from $100,000 a year, where it is now, to a little over $122,000 a year. And they’re planning, also, to put in annual increases to those figures, either using a percentile system or the CPI, Consumer Price Index. And then they’re asking employers and the public for input on whether they should also tighten up the duties tax for exempt employees. And they’re thinking about going with a California-style rule where exempt employees would have to perform the high level, professional, managerial duties at least 50% of the time in each work week.
So this is really big. We know for sure that the salary will be going up soon, and this is going to impact almost every workplace in the U.S.
Brandon: So, again, these are just proposed changes at this point, and we don’t have a hard number for where the increase is going to be, because there’s been some numbers thrown around. You just alluded to the fact that there’s definitely an increase coming and the numbers have been tossed around and definitely the media’s picking up a lot of this. Where do we stand at this point?
Dan: Yeah, so it is important for employers to understand that right now we just have proposed rules and the final rules haven’t come out yet. It probably is not going to take effect until sometime next year in 2016. But the DOL has given us a real clear idea of where they’re going. And they quoted a figure of $921 per week for 2013 using their percentile system, which is at the 40th percentile of salaried employees, but they say in their publication that they’re projecting it to be $970 a week in 2016.
Now it could end up being a little higher or lower than that when they finalize the rules. They’re still in the comment period right now. So we don’t know exactly where it’s going to land, but we know pretty close, and so it’s smart for employers to start planning ahead and thinking about this and determining their strategy because this is going to be a big change. The DOL, the U.S. Department of Labor, says they think it could affect as many as 21.4 million employees in the U.S.
Brandon: That’s insane. Wow.
Dan: Yeah, so this is big! I’ll take a second and give you the whole history, because it goes back almost 80 years to 1938. That’s when they first passed the FLSA. Anyone who deals with the wage & hour law knows that a lot of it is kind of antiquated. They wrote it for back then and how work was done back then, in 1938. And there have been many amendments to the FLSA over the years where they tried to update it and modernize it, but there’s still a lot of stuff that doesn’t make a lot of sense in today’s world.
Since 1938, the DOL, the U.S. Department of Labor, they’ve raised the minimum salary for white collar exempt employees seven times. They started out doing it about every seven years or so, but then there were these big gaps. And so we had a salary increase in 1975 where they raised that salary to $155 per week or $250 per week—they were using either a long test or a short test back then. But then they waited almost 30 years, 29 years actually, to make the next big change which was in 2004.
A lot of folks, if you’re in HR or a manager, you might remember back to 2004 when it changed the last time. At that time they raised the weekly salary to a minimum of $455 per week, so that was 11 years ago. Back in 2004 they were calling those the Fair Pay Regulations, that’s the DOL’s name for those rules. And these are the rules that talk about who can be classified as a white collar exempt employee in the Executive Administrative Professional category, the EAP category. And they said they were going to plan to update that salary more often, that they weren’t planning to wait another 30 years, but it’s taken 11 years and we’re still at that same exact place now, that $455 per week. So it’s never gone up with inflation, and the DOL says that salary is the same as $23,660 a year, and that’s below the poverty threshold for a family of four, which is actually a little over $24,000, and it’s also below the 10th percentile of full time workers. So what they’re saying is, Hey, we should have set it higher back then, and it’s high time that we raise it. President Obama actually ordered them to do that.
Brandon: I’m kind of curious—so it’s $23,660 right now annually, and then where they want to raise it to, is it almost double? Is that what I’m understanding?
Dan: It’s more than double.
Brandon: More than double!
Dan: They project it’ll be $970 a week in 2016, which is the same as $50,440 a year. So it’s a big change. And President Obama ordered them to do that last year and in March of 2014 he signed a presidential memorandum that said, DOL, I want you to update these white collar regulations and I want you to modernize them and simplify the rules. And so the DOL has been working on that for a long time and they kept pushing out the release date over and over, but they finally announced it on June 30th of this year, and then they published them in the federal register on July 6th, just over a month ago. And what they published is 295 pages. Now, I have read all 295 pages—I can assure you, you don’t want to! But what we’re going to discuss in this brief podcast really covers the essentials there. The actual rule changes in there is just about 10 pages, the last 10 pages of that big publication.
Brandon: And again, this is all proposed at this point, so let me ask you this, if you were a betting man, would you say that for sure in 2016 at some point, whether it’s 1/1 of 2016, there will be a change?
Dan: Yeah, for sure it’s going to happen. And the timing is a little up in the air. Right now we’re in the 60 day comment period where the public can comment on these proposed rules. When they get these comments and review them, they’ll then finalize their rules and submit it for interagency review. That whole process can take several months and sometimes as much as 12 months, but if I had to bet I’d think that probably the final rules will come out early next year in 2016 and they’ll probably take effect sometime in the middle of 2016, that’s just a guess. But the last time they did this, back in 2004, they published in the federal register on April 23rd, 2004 and they actually gave employers four months until August 23rd, 2004 before it actually kicked in and took effect. So employers are going to have a heads up and some time, but they should still be planning now and thinking about strategy and how this is going to affect their employees.
Brandon: I imagine one thing that’s on a lot of employers’ minds at this point as they’ve heard a lot about this in the media is the testing. So right now there’s probably a set of testing rules and you could probably go into that at a high level for the white collar exemption, at this point. What is it going to do when it changes? How do the testing rules change?
Dan: That’s a good question because, really, those tests are not going to change. The duties tests are still going to be there. In fact, the DOL is asking us, should we tighten those rules up and have a percentage like California, like 50% of the time? But those rules, we could do a whole two-hour class on those duties tests, but really quickly what they are:
For executives, the executive or supervisor has to be supervising 2 or more full time employees at least, or the equivalent. They have to have hiring or firing authority, or have to be able to make recommendations that carry weight on that. They have to have, under Oregon’s law still, they have to have independent judgment and discretion on how they do their job. And their primary duty has to be kind of in that high level supervision.
And it’s the same for professional employees if we’re talking about lawyers, doctors, architects, engineers, CPAs, pharmacists, these recognized, learned occupations where you’ve got to have a four year degree minimum and usually more than that.
And then there’s the administrative category, which is where all the litigation happens. The fuzziest one of all three is the administrative category, where we’re talking about people like you, like a Marketing Director or someone who heads up an HR department or a labor relations department or maybe the right-hand person to a CEO of a big company who does lots of high-level management duties. And these are not the people who do the day-to-day work at a company, but they are supporting the business operations. And so you have to still meet these duties tests, that’s not changing. The big thing that’s changing is that whole salary level, and that might kick a lot of people out of the exemption, where they’re going to have to start getting overtime, unless the employer boosts them up to that new higher salary.
Brandon: I imagine you do a lot of consulting with employers on the duties testing portion alone, just to make sure that they don’t get themselves in hot water long term. Do you have any tips for how to do that test if you have a lot of employees, and a lot of managerial and executive types? How do you go through that process?
Dan: It’s not easy, but often my clients will send me a job description, or say here’s a lot of job descriptions for this job category—we have Engineer 1 and Engineer 2. I’ll look at those job descriptions and look at the essential functions and look at what they mostly do to see if it matches up with the duties test. It makes sense to have accurate, updated job descriptions because the DOL says it doesn’t matter what you have on a piece of paper, it doesn’t matter even if you give them a really fancy job title. What really matters is the facts on the ground, what do they actually do in each work week? So the job description is helpful if it’s updated and accurate, but it won’t save you if they really are doing a lot of routine stuff, if it doesn’t match up.
Brandon: If the DOL actually tightens up the duties test as you mentioned a little bit ago, how far in advance do you think we’ll actually know that, so employers can properly plan?
Dan: When they issue the final rules, we’ll have several months before it goes into effect. My guess is that they’re not going to do that this time, because they didn’t put that in the proposed rules. In the proposed rules they just said, Hey, give us your feedback. We’re thinking about tightening up the duties test, something like maybe California with a percentage. Because right now that primary duties test is pretty loose. It says, generally they should be doing it half the time, but sometimes they’ll still qualify even if they do exempt stuff less than half the time. And sometimes it could be only ten percent of the week that they’re doing superrevision and they still could qualify if that’s really their primary purpose. And there’s a lot of these kinds of working assistant managers or middle managers who are there flipping burgers by the other people and are ringing up people at the cash register and stocking shelves, and that’s where a lot of the litigation has happened. And down in California, a lot of those people end up being non-exempt, and there have been a lot of class action lawsuits because of their tighter rules.
So that could be a big change, but my guess is that they’ll probably wait for the next rulemaking to change that part of it. That’s just a guess, but we’ll know ahead of time, we’ll have a heads up.
Brandon: I’ve seen it in the media and I’m sure you have as well, and all these articles that are coming out about this proposed change. But there are a lot of stories out there saying that the overtime rules are changing, what do they even mean by that?
Dan: Yeah, so technically they’re wrong. There’s a lot of shorthand references like that in the news. They say, Oh, the overtime rule is changing. But that’s actually not true, the overtime rule is the rule that says if a non-exempt employee works over 40 hours in a week, they have to get time and a half. So that’s staying exactly the same, nothing about the overtime rule is changing, that’s been in place for eighty years almost under the FLSA. And most of the states follow that, although California has daily overtime and Oregon has daily overtime for certain manufacturing employees, but that’s the general rule that most states follow, anything over 40 hours. Nothing about that is changing.
What is changing is that they’re tightening up these rules for the white collar exemption. So there are probably going to be a lot fewer people who qualify as exempt, and that means more people are going to qualify for overtime under the existing overtime rule.
Brandon: So it almost sounds like if they’re salary now, they may go backwards now on the whole testing and all that, through this new proposed law?
Dan: Well if they’re salaried now and they’re at a lower salary than the new threshold of $50,440, employers are going to have a decision to make. You know, what do we do here? Are we going to boost this person up to that level and are we going to keep watching changes every year and keep boosting it up annually when it goes up so that they match the minimum salary? And are we going to make sure that they still meet the duties test and just keep them exempt? Or are we going to switch them back to hourly or non-exempt and just pay them overtime after 40 hours, and that means we have to track their time each day, each week, we have to give them rest breaks and meal periods under state law. We have to make sure their salary comes out to at least minimum wage, but the big piece is that they’re eligible for overtime.
And then they have to make a decision—if we do switch them to hourly, how are we going to do that? Are we just going to take their weekly salary and divide it by 40? That’s one way to do it. But then, what if they’re working a lot of overtime? They could end up getting way more than what they’re making today under their salary. So are we going to set the hourly rate lower, if they’re working overtime so that they come out to roughly the same annual salary? What will be the employee morale effects on that? There are lots of things for employers to think through.
Brandon: Hmm. Good point, yeah.
Dan: And also, there are a lot of employees who have this prestige factor with being salaried. So what if we switch them to non-exempt but we don’t want to ruffle the feathers too much, we want to keep them salaried so they have that prestige factor? A lot of employers do that, but what they do is they make them salaried, non-exempt. So that means that even though they’re salaried, we still have to keep track of their time and make them take the rest breaks and meal periods, and then we still have to pay them overtime on top of their salary if they go over 40 hours. And so we might decide that we’re going to do that but we’re going to limit their hours so we don’t have such a big overtime hit and maybe hire more people instead. There’s lots of employee relations issues and decisions to make there.
Brandon: This is beyond confusing, but this actually seems more simple than the 295 pages that are out there. Like, the way you articulate it seems simple. But for employers right now, they’re probably in limbo, they’re saying, Should I do something now or should I wait until the final rules are out?
What should they do at this point? What are some practical action items?
Dan: So I think that they’d want to wait to make any final changes until we actually know what the new rules are. And before I go through that kind of strategy, which involves doing a self-audit, let me say a little bit more about what the actual proposed changes are. They’re talking about making that duties test stricter, to maybe that 50% standard like California, but the part we know for sure is the salary is going to increase substantially. And so, like I said, the current salary has been at $455 a week, and that’s $23,660 a year, and that’s been for the last 11 years. That’s where we still are now. And what they’re proposing to do, which I didn’t explain explicitly before, they’re proposing to set the salary at the 40th percentile of weekly earnings for all full time salaried workers. And so that level, as I mentioned before, it was $921 per week in 2013. And this is a statistic that’s put out by the BLS, the Bureau of Labor Statistics, you can look it up online. And that 2013 figure is about $47,892 a year. But they’re saying that in 2016 that 40th percentile will be $970 per week. That’s the projected figure, and that’s where I’m getting that $50,440 a year figure.
So if an employer has an exempt employee currently who is earning less than that, less than $50,440, they have to decide- are we going to bump them up? Are we just going to reclassify them as non-exempt when these new rules take effect? And employers will be getting questions from employees hearing this in the news—Hey, what are you doing about this? It’s important to say, We’re aware of these upcoming changes, but you should know that these are just proposed rules and we’ll be watching when the final rules come out and we’ll be letting you know about our decisions then. Because employees hear it and already think that something has changed when they hear the news stories. The final rules also say that the DOL’s going to also build in some annual increase methodology to increase these numbers, and one way they say they might do it is to stick with that 40 percent figure each year, the 40th percentile, or they say they might use the CPI-U, which is the Consumer Price Index for Urban consumers. And that would index it to inflation, just like our Oregon minimum wage is indexed to inflation, same kind of idea.
And the other change that I mentioned is for highly compensated employees. And under the current rules, if I get $100,000 a year or more, my employer can classify me as exempt as long as I do any one exempt function. It’s a pretty easy way to get there, I don’t have to meet all the duties test. Just $100,000 and any one of them to function. Well, so in these new rules, they’re proposing to raise that to $122,148 would be the minimum for a highly compensated employee. And the way they got there was putting it in the 90th percentile in that same measure from BLS. And so it’s easy to get an exempt employee to the exemption that way, but it’s going to be harder when they raise that salary. It’ll also be indexed annually to increase.
Also, keep in mind, here in Oregon there is no highly compensated employee category in our state wage and hour laws. So even if I do earn a super high salary in Oregon, I still have to meet all the regular duties to be exempt from overtime under our state law.
Brandon: Very interesting. So, these are obviously not final at this point, but those are some big changes.
Dan: Yeah, so the things that employers should be doing right now, first of all, talk about this with HR, take a look at your job descriptions, do an internal self-audit on your employee classifications right now, just under the current law. Consider, Do we have risks already just under the current rules? Do we have people who we think are misclassified in the supervisory, the administrative professional categories? So you need to do a really careful review of job descriptions and a really careful review of what the workers are actually doing on the ground each week and not just what it says on that piece of paper.
If an employer thinks that they’ve already got misclassified employees under the current rules—and keep in mind, the U.S. Department of Labor has been doing tons of audits in this area, and they say, based on their stepped-up audits, they say they’re finding 70% of employers out there have misclassified employees already. So, if you come to that conclusion, that you’ve got some people in the gray zone where they could go either way, it’s kind of iffy, I always advise employers to err on the side of non-exempt classification. Because the truth is, most employees are non-exempt, it’s only a small percentage who will qualify as exempt usually.
And this year would be a really good time to do that kind of change, because you kind of have these new rules in the news as a cover or sort of an explanation for saying, Hey, we know these new changes are coming. We’ve decided as an employer that we’re choosing to reclassify you going forward as non-exempt. And you can do it in a way that’s kind of seamless and that hopefully reduces your risk that way and just makes the change going forward without saying, Oops, we blew it and we’ve misclassified you and we owe you three years of back-overtime. Hopefully you do it in a way that doesn’t scare up claims, but this gives you an opportunity to make that change going forward, and a lot of my employer clients have done that.
Also, like we said, we want to look really carefully at those employees who are in that salaried zone where they’re between the current salary of $23,660. Between that and the new salary which is $50,440, they’re projecting, anyone in that range, we have to start making some contingency plans. What are we going to do with these people? Are we going to convert some of them to non-exempt, and then how are we going to set their hourly rate or are we going to keep them salaried non-exempt, which is more complicated, but then they have that prestige factor of still being salaried?
And then, if you’re going to make them salaried non-exempt, there’s some decisions there. Are we going to have a fluctuating work week agreement with them, because they sometimes go above 40 hours or below. In those cases, you can have that kind of agreement in advance, and you only have to pay overtime at a 0.5 rate instead of 1.5 on top of their salary. But if you don’t have that kind of agreement or their hours don’t fluctuate, you have to pay them at the 1.5 rate on top of their salary.
So, lots and lots of issues to think about, but either way, if you’re going to convert people to non-exempt, it means we’ve got to start tracking their daily and weekly hours, giving them rest breaks and meal periods, paying them overtime after 40 hours a week, and so that means we’ve now got to come up with some method to track these people’s hours, where in the past we haven’t been doing that with a lot of these people.
You know, another thing is for someone who’s making let’s say $48,000 a year right now, it probably makes sense to just boost them up to $50,440 if they still meet all the tests to be exempt. So it’s going to be different for each employer.
Another thing to think about, some employers have salary ranges for jobs, where let’s say the range for this job is $45,000 to $55,000. Well that is staggered right across that new threshold of $50,440, so that means we’ve got some people below the threshold and some people in this job above. So what are we going to do with that? Are we going to move the whole salary range up above the $50,440? Are we going to have some people non-exempt in this range and some exempt? There’s lots of issues that are going to come up.
It is simple on the face of it, but it creates a lot of strategy issues and decisions for employers.
Brandon: But I think the action items you laid out with the self-audit and really just organizing yourself around how to track this, I think that’s probably a good action for right now, so that way when the final regulations do come down, that you’re prepared to make a change. And when you do decide to make that change, whether it’s to exempt or non-exempt, when should that happen? And also, what else should take place at that point?
Dan: You’re absolutely right! The advanced planning now is going to pay off, because you’re only going to have a few months once the final rules come out. There will be a lot to do and a lot to think about.
So on the timing, I wouldn’t convert anyone right now. If you’re confident that they’re properly classified right now, I would wait. I would start maybe thinking about revising job descriptions and doing your self-audit and consider doing that self-audit under attorney-client privilege, talking with your labor employment attorney throughout that process to keep it a privileged, not something discoverable. That’s usually a good option here.
But I would wait to finalize your audit, your self-audit, until we know exactly what the final rules say. Because if we boost employees up to $50,440 right now, and then it turns out that the DOL decides, Ok, we’ve considered employer comments and we’re only going to set it at $47,000. Then you’ll probably be a little peeved that you did that. So I think it makes sense to wait and see exactly what the final rules say. Right now we’re still in the 60 day comment period, which goes through September 4. And by the way, if you want to submit comments you can go on the DOL website and read these rules and it tells you how to submit comments. And there’s organizations like SHRM that have asked to extend the 60 days and have a longer comment period, so it might get extended.
But after that comment period, DOL’s going to review all the comments and then they’ll draft their final rule and have it reviewed. It probably will be several months into 2016 before there’s anything final. But, like I said, this year could be a good time to change your classification if you know or strongly believe that someone is misclassified already.
So, bottom line, we don’t have the changes or anything final yet, but we know the salary is going to go up dramatically, so employers should be planning for that right now. You should work with your friendly Xenium HR consultant or your friendly labor and employment attorney and get going on your planning.
Brandon: Speaking of that, Dan, we appreciate you for being on the podcast. For one, you’re a wealth of knowledge and we definitely appreciate you. Give out your information, if you will—I think people would love to get in contact with you if they have a need.
Dan: Sure! So I’m Dan Grinfas and I’m with Buchanan, Angeli, Altschul & Sullivan in Portland. The quickest way to get to me is to go to my website, which is www.baaslaw.com.
Brandon: Dan, I appreciate you being on the podcast. Definitely excited and anxious about what’s to come!
Dan: Yep, big changes, and definitely—thanks for having me!