Change is coming. Many employers will be affected when the new Exempt wage rules are released by the Department of Labor (DOL) sometime in 2016.
The Department of Labor is in the process of reviewing comments submitted in response to their proposal to raise the minimum salaries for Exempt employees from $455 per week ($23,660 annually) to $970 per week ($50,440 annually). The last increase to minimum salaries was in 2004. Many people expected an increase soon but not to this extent. This ruling also has an automatic annual adjustment which will not allow the minimum exempt wage to fall below a standard calculation of the 40th percentile of weekly earnings for full-time salaried workers. With this change we can also expect an increase in DOL audits to assure employers comply with the new ruling.
I presented this information to a business group in October and received a variety of comments and reactions ranging from, “There are rules when classifying an employee as Exempt?” to “I can’t pay that to my salaried employee — I will go out of business!”
For this reason I will start with the basics and break the classification rules into two parts.
Part 1. An Exempt employee is an employee who is exempt from wage and hour laws. If not classified as Exempt, an employee will be classified as Non-Exempt and be subject to wage and hour laws. Non-Exempt employees are paid overtime for all hours worked over 40 hours per week. Note: There may be rules for specific jobs (such as nurses) that fall under an 8 and 80 rule, where overtime is paid for all hours worked over 8 hours in a work day or 80 hours in a two week pay period. As mentioned earlier, sometime in 2016 employees making less than $970 per week will not be able to be classified as Exempt.
Part 2. Once an employee or position meets the part 1 “Exempt” wage requirement and the employer desires the position to be classified as Exempt, the position or employee needs to be placed into an additional classification such as executive, professional, administrative, outside sales and some positions in the computer field. Each of these classifications has job duties test requirements that also need to be met before an employee can be classified as Exempt.
Don’t underestimate the power of an “Exempt” classification. Over the years the Salaried Exempt classification has become a status symbol and considered to be higher level positions than those classified as hourly. This may prove problematic to employers if and when they need to reclassify Exempt employees to a perceived lower status of Non-Exempt. To complicate things further, employers can classify employees as Salaried Non-Exempt, where the employees have greater flexibility but would need to record hours worked for overtime calculations.
It is believed that once the new ruling is announced, employers will only have a short time (30-60 days) to comply.
What should employers do to prepare for the 2016 ruling?
Start doing their homework so they will know each employee’s true hourly wage based on the hours they are currently working.
Review all Exempt job descriptions to assure they are up to date and reflect all current tasks and responsibilities.
Conduct wage surveys based on the updated job descriptions.
Reclassify employees who are misclassified as Exempt, either because they are not currently making $455 per week or do not meet the job duties test requirements for their position. There is risk here, but employers may save up to a year of overtime pay in addition to penalties that could occur if the employee reports them to the DOL.
Start the communication of the proposed rule change to all Exempt employees. Let them know change is coming and if their position is affected it is not a reflection on them or their quality of work. It is the law.
Change is difficult for both employers and employees. The sooner employers start preparing for the upcoming changes the better. The Fair Labor Standards Act (FLSA) and regulations can be confusing. I would suggest that employers read and understand this important legislation and contact a labor law attorney or human resources professional to assist them through this process.
Douglas R. Pepin is a business consultant and owner of Advise-HR LLC. He has more than 25 years managing business human resources departments. Learn more at advise-hr.com or 651-888-1113.