On March 7, 2019, the Department of Labor (DOL) announced a new Notice of Proposed Rulemaking (NPRM) that would increase the salary threshold for employees eligible to collect overtime pay. Under the new proposal, exempt employees would have to earn at least $679 a week ($35,308 a year) to be classified as exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). That is significantly more than the current level in which employees must earn at least $455 a week ($23,660 a year), the threshold that has been in place since 2004.
In addition to meeting the “salary test,” exempt employees must meet the “duties test,” meaning they must perform work fulfilling the requirements of exemptions for positions such as the executive, administrative, or professional.
The new proposed rule follows a 2016 attempt by the Obama administration to change the salary test. That proposal called for a salary threshold of $913 a week ($47,476 a year). A federal district judge in Texas struck down that rule before it was to have taken effect on December 1, 2016. The new rule will be up for public comment for 60 days and could be revised or even challenged in court again, but since it calls for a far less drastic change than the previous proposal, it is seen as likely to take effect.
The new proposal will likely have an impact on restaurants and other service industries as well as nonprofits. Now that the U.S. Department of Labor (DOL) has proposed a new rule affecting overtime eligibility—a rule that is more likely to be implemented than the department’s previous attempt under the Obama Administration. It is now time for employers to begin studying how they classify their employees so they’ll know whether pay raises or classification changes will be necessary when a final version of the new rule goes into effect.
Review Current Classifications
Since a major change is on the horizon concerning who qualifies for overtime, it is time for employers to gather information as a first step in their analysis of the best business response. If they have employees currently classified as exempt—and therefore not eligible for overtime pay—but making less than $679 a week, employers need to determine whether they will change their classification to nonexempt or raise their pay above the overtime threshold. However, pay is not the only consideration.
First, it is critical for employers to first make sure the employees are correctly classified based on their job duties, before making a decision as to whether to preserve the exemption by raising pay. Since exempt employees need to meet not just the salary test but also the duties test, it is imperative for employers to demonstrate that an employee’s job duties truly are executive, administrative, or professional or that the individual works in outside sales or certain computer-related occupations.
A close examination of the duties performed by exempt employees who make less than the proposed new salary threshold may not justify the exemption. It is very risky if a category of employees, within a certain pay range, are improperly classified as exempt to begin with based on their level of authority and responsibility and nature of their job duties.
If employers decide to reclassify currently exempt employees to nonexempt, they face a training issue, since exempt employees will not be accustomed to keeping track of their time. Newly non-exempt employees must be trained, and the training must be reinforced with monitoring and supervision of timekeeping, particularly during the early stages of the transition.
Benefits, Scheduling and Flexibility Considerations
Another issue to consider is that some employers condition certain benefits on being “salaried,” so employers will need to determine how reclassification might affect formerly exempt employees’ eligibility for benefits.
Some employers may find that their lower-level exempt salaried employees actually were working less than 40 hours a week. If these employees are changed to hourly status based on the assumption of a 40-hour workweek, in order to make the same pay as they made as salaried employees, they are going to need to work more. Conversely, some exempt employees are working well over 40 hours, and employers who switch those employees to nonexempt status need to think about ways to control those costs while achieving the same level of productivity but also making sure no time is worked off the clock.
Some employees currently classified exempt might welcome a switch to nonexempt to make them eligible for time-and-a-half overtime pay. Others might resent the change, thinking it takes away some of their flexibility and prestige. As a result, how employers communicate major pay changes may be challenging. The emphasis should be on the fact that classification is not a matter of preference or a voluntary choice by either the employer or the employee. It should be clear that employers are not making changes to insult or hassle employees—they have no choice.
What to Do Now
Now is the time for employers to begin researching and planning, but it is not yet time to reclassify any employees. The proposal is not final yet and may be modified or subject to legal challenges. When the final rule is published, a deadline for compliance and a grace period of several months will likely be included.