The New Salary Regulations: Are You Ready? John T. Roache July 27, 2016

Akerman | 2  DOL’s Final Rule updates salary level for executive, administrative and professional (“white collar”) exemptions  Key changes  Impact of Final Rule  Options for compliance with the Final Rule Are You Ready?

Akerman | 3  Salary Basis Test  How paid  Predetermined and fixed salary not subject to reductions  Salary Level Test  How much paid  Meet minimum as specified by regulations  Duties Test  Primary duties (executive, administrative, or professional) “White Collar” Exemption

Akerman | 4  PAYMENT ON SALARY BASIS ALONE DOES NOT MAKE AN EMPLOYEE EXEMPT  JOB TITLES NEVER DETERMINE EXEMPT STATUS  SALARY BASIS, SALARY LEVEL PLUS DUTIES = EXEMPT Reminder

Key Changes Imposed by the Final Rule

Akerman | 6  From $23,660 ($455 per week) to $47,476 per year ($913 per week)  Represents 40 th percentile in lowest-wage Census region (currently the South) Change: Increase in Standard Salary Level

Akerman | 7  Highly Compensated Employees  From $100,000 ($1, per week) to $134,004 per year ($2,577 per week)  90 th percentile for FT employees nationwide Change: Increase in “HCE” Salary Threshold

Akerman | 8  Employers can use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level  Must be made at least on quarterly basis  “Catch-up” payment permitted at end of each quarter, but MUST be paid within next pay period  Cannot use bonuses and incentive payments to meet standard for HCE Change: Use of Incentive Compensation up to 10%

Akerman | 9  Salary threshold level automatically updated every three years  Next increase: January 1, 2020  DOL estimates increase: $51,168 for standard salary level and $147,524 for HCE  To be maintained at 40 th percentile of FT salaried workers in lowest-wage Census region  DOL plan on announcing increase 150 days in advance of effective date (target early August 2019) Change: Automatic Updates

Akerman | 10  December 1, 2016  4.2 million workers expected to gain new overtime protections or get a raise Final Rule Effective Date

Akerman | 11 Why the Salary Increase?  DOL’s views  Last updated 2004  Put more money into the pockets of many middle class employees—or give them more free time  Prevent future erosion of overtime protections and ensure greater predictability  Strengthen overtime protections for currently exempt employees  Provide greater clarity for workers and employers - easier to differentiate between exempt/non-exempt employees

Akerman | 12 Why the Salary Increase?  DOL’s views  Increase employment by spreading work  Current salary level below poverty level for family of four  Improve work-life balance and employees’ health  Lead to less litigation

Important Notes to Remember about the Final Rule

Akerman | 14 DOL’s Final Rule...  Does NOT change Duties Test  Executive  Administrative  Professional

Akerman | 15 White Collar Exemptions  Executive Exemption – to qualify under NEW Rule, must meet all of the following:  Compensated at no less than $913/week ($47,476/year);  Primary duty of managing the enterprise, or managing a customarily recognized department or subdivision;  Must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and  Must have authority to hire or fire other employees, or employee’s suggestions and recommendations as to hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight

Akerman | 16 White Collar Exemptions  Administrative Exemption – to qualify, must meet all of the following:  Compensated at no less than $913/week ($47,476/year);  Primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and  Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance

Akerman | 17 White Collar Exemptions  Professional Exemption (two types)  “Learned Professionals” – to qualify, must meet all of the following:  Compensated at no less than $913/week ($47,476/year);  Primary duty must be the performance of work requiring advanced knowledge (work that is predominantly intellectual in character including work requiring consistent exercise of discretion and judgment);  Advanced knowledge must be in a field of science or learning; and  Advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction

Akerman | 18 White Collar Exemptions  Professional Exemption (two types)  “Creative Professionals” – to qualify, must meet all of the following:  Compensated at no less than $913/week ($47,476/year); and  Primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor

Impact of the Final Rule on Certain Sectors

Akerman | 20 FLSA Coverage and Non-Profits  Neither FLSA nor new Rule provide an exemption from OT requirements for non-profit organizations  Ways covered by FLSA:  Enterprise Coverage  Annual revenue $500,000 or more  Non-profit organizations with commercial activity for business purpose with annual sales of $500,000 or more (i.e., gift shop or service for a fee)  Income from contributions, membership fees, dues and donations NOT counted towards $500,000 threshold

Akerman | 21 FLSA Coverage and Non-Profits  Ways covered by FLSA:  Individual Coverage  Regularly engages in “interstate commerce” or production of goods in interstate commerce  Examples of individuals covered:  Types letters to send to other states  Ships material to another state  Transports persons or property to another state  Processes credit card transactions

Akerman | 22  Exposure for non-compliance  Overtime wages for past 2 years (3 years if willful)  An equal amount as liquidated damages  Interest  Attorneys’ fees and costs  Claims may be brought as a collective action for all similarly situated employees  State laws may provide protection even if the FLSA does not apply to the employer Mistakes Are Costly

Options for Compliance to the Final Rule

Akerman | 24  Raise salaries of employees who meet duties tests, earn close to new salary level, and regularly work overtime Raise salaries

Akerman | 25  #1 Reclassify as non-exempt, adjust base pay, pay the salary for first 40 hours per week, and then overtime for any hours over 40  Adjust amount of employee’s earnings to reallocate it between regular rate of pay and overtime compensation  #2 Reclassify as non-exempt and use the Fluctuating Workweek Method  #3 Reclassify as non-exempt, pay on an hourly basis, and pay overtime at 1.5 times the regular rate Reclassify as Non-Exempt

Akerman | 26  Reduce hours  Reorganize workload distribution  Adjust employee schedules  Hire additional employees Reorganize and Adjust to Avoid Overtime

Akerman | 27  Use DOL’s Final Rule as reason to conduct audit now - ensure all employees are properly classified Conduct Audit NOW

Akerman | 28  No requirement to automatically convert employees to hourly pay where they do not meet the new salary threshold.  Employees may be categorized as salaried, non-exempt and paid overtime based on their salary.  Employers can use any method for recording hours, as long as employer’s system is complete and accurate. Best practices would include a system pursuant to which employees verify the hours worked on a weekly basis. Additional Reminders

Akerman | 29 John T. Roache, Partner Labor & Employment Attorney Akerman LLP (Chicago, IL Office) 71 S. Wacker Drive 46 th Floor Chicago, IL Subscribe to Akerman’s HR Defense Blog! ( Contact

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