FLSA – Reviewing Your Employee Classifications and How New Regulations May Impact Your Practice

Topics Wage and Hour Division (WHD) enforcement Exemption problems and challenges Proposed regulatory changes Affected employees Impacts of the changes When a rule might appear Preparing for the changes

Why Review Classifications Anticipation of extra enforcement Wrongful classification can be costly Failing to count hours or compensation 2015 WHD collected $246 million Good faith error Back pay for two years Willful violation (lacking good faith) Three years back pay, plus Equal amount in damages, plus

Exempt Classifications Executive – applied to supervisors and managers Administrative – for employees with substantial amount of authority and discretion Learned Professional – covering employees who analyze facts and draw conclusions Creative Professional – actors, musicians,etc Computer employees – programmers, developers Outside sales – employees who spend most time traveling

Exemption challenges Common challenges to exempt status Executive: Decision-making authority as to hiring, firing, and otherwise running a department Administrative: Discretion and independent judgment on matters of significance

Exemption challenges Common challenges to exempt status Learned Professional: Educational requirements Computer Employee: Not designing/creating systems Outside Sales: What counts as sales

Proposed salary increase Proposed rule July 6, 2015 Minimum salary to double from $455 to $970/week This would be equal to $50,440 per year Annual increases based on the 40th percentile or the Consumer Price Index (CPI, or inflation rate)

Highly compensated employees Employees earning $100,000 per year may be exempt with less focus on duties Proposed: Increase to $122,148 per year 90th percentile May increase annually Highly compensated employees

Proposed Changes: When? Reviewing 260,000+ comments When will the final rule be published and effective? Regulatory agenda estimates July 2016 Could be later, could be sooner Solicitor of Labor Smith said “later” in 2016 Secretary of Labor Perez said “spring” of 2016 Effective date could be 60 days after publication

Reasoning is that old (pre-2004) rule had: Two salary levels (low and high) Two duties tests (short and long) Higher salary had less stringent duties tests Low salary had longer duties tests

Employees affected Would affect only executive, administrative, and professional (EAP) exemptions (white collar) Not affecting outside sales, hourly computer employees, teachers, lawyers, doctors, interstate drivers, commissioned sales employees, etc.

DOL estimates 21.4 million EAP exemptions Of which 4.6 million below the proposed salary level EAP exemptions have salary test and duties test Those paid less than $970/week would not meet the salary test and could not be exempt Those paid more must still meet the duties tests

Possible duties changes To require a specific percentage of time Proposed rule suggested 50% (California model) Under the pre-2004 rule, the requirement was 80% for most EAP workers, or 60% in retail Current rule of “primary duty” even if less than half time spent in exempt work

Planning for changes Verify that employees are correctly classified Identify EAPs earning less than $970 per week Final rule salary might be lower, but don’t bet on it If some will no longer qualify, decide whether to make them nonexempt or increase their salaries Decisions may be impacted by duties test revisions

Changing to hourly To identify a possible nonexempt hourly rate: Track hours to determine average overtime hours You “may require exempt employees to record and track their hours and to work a specified schedule” (FLSA 2005-5) Multiply overtime hours (those beyond 40) by 1.5 because overtime is at 1.5 times the regular rate Divide total by current salary

Retaining the exemption If you would like to retain the exempt status: Must be paid at least the new salary If percentage must be spent in exempt work, track: Hours performing exempt duties, and Hours performing nonexempt duties Some states already impose a percentages 80% for EAP exemptions, 60% in retail Concurrent duties not allowed in some states

Duties challenges Example for supervisor: Michelle is a supervisor earning $1,000 per week Spends 70 percent of time in nonexempt duties Could be exempt now under the concurrent rule If a new rule requires spending 50% of the time in exempt work, that should be tracked also Might not qualify under the upcoming rule, despite a salary in excess of $970 per week

Summary of steps to take Verify current exemption status Understand duties requirements Evaluate salary levels Anyone below $970 per week is affected Might lose exemption regardless of pay Have several plans to implement on short notice Example: If no duties test change, raise salary. If percentage requirement, switch to nonexempt.