White Collar Salary Exemption Gets the Squeeze

As we’ve discussed in earlier articles, in order to treat an employee as exempt from the Fair Labor Standards Act’s overtime requirement, the employee must (1) meet a salary threshold, (2) be paid on a salary basis, and (3) perform certain “white collar” job duties. Recently, the Department of Labor announced that it intends to restrict this test and reduce the number of employees eligible for exempt status. In particular, the DOL intends to raise the salary threshold from around $24,000/year to around $50,000/year. This means that, once implemented, the new rule will prevent employers from classifying employees as exempt who earn less than around $50,000, even if they are managers or perform critical work for the company.

Beyond this change, the DOL is proposing to increase the salary threshold on an annual basis. So, for example, while the new salary threshold might start at $50,000 in 2016, it could rise to $51,000 in 2017, $52,000 in 2018, and so on. As such, to continue to treat an employee as exempt who is at or near the salary threshold, employers may be forced to give annual raises, regardless of individual performance, company performance, pay freezes, etc. Otherwise, those employees may go from exempt to non-exempt, despite performing the same job from year to year.

While the DOL believes it has the best interests of employees at heart, employers know that most employees transitioning from exempt to non-exempt as a result of this change will be disappointed. Indeed, many salaried employees take pride in their exempt status, and appreciate the flexibility it affords. Unfortunately, the Fair Labor Standards Act does not permit employers and employees to decide what compensation arrangement works best for both parties, and many salaried employees will become hourly, regardless of their preferences.

Even though we don't have the final regulations, we have enough of a sense of what the DOL plans to do that we recommend that companies start preparing for this change.

As you move toward year-end and begin thinking about your labor budget in 2016, keep in mind that you may have salaried employees who will either need to convert to hourly employees or receive a raise (possibly a substantial one) in order to remain exempt.

David James and Joe Schmitt are shareholders in the labor and employment group at Nilan Johnson Lewis and provide HR legal advice to our members at no cost. S

Fast Facts: Thirty-eight percent of likely U.S. voters think Americans work harder than people
in most other countries. Twenty-two percent say Americans don’t work as hard, while 26% feel they work about the same amount as those in other countries. The remaining 14% are not sure.

Among those surveyed, 17% work a standard 40-hour week. Thirty-one percent
say they work more than 40 hours a week, including 8% who spend more than 50
hours a week on the job.

Source: Rasmussen Reports