USDOL Has Finalized Changes to the FLSA White-Collar Exemptions: Urgent that Employers Plan for Major Disruption

After completing its review of nearly 300,000 comments, the U.S. Department of Labor has submitted its final overtime rule to the Office of Management and Budget (OMB), which is the last step in the mandated review process. We know this because notice of the filing was posted on March 15 at the reginfo.gov website.  What we don’t know is what the final regulations actually say. That will not become known until OMB completes its review, and the rule is published. Most insiders believe that will occur within the next 30-45 days. Once the rule is published, USDOL is unlikely to give employers more than a 60-day grace period to implement, which means the new rules will likely have an effective date on or before July 1, 2016. At that point, according to the Department’s own estimate, the compensation plan for millions of workers must change. Consequently, it is urgent that employers start planning immediately as to how they will cope with the new rules.

Although it is not known to what extent the final changes will track the proposed rules issued back in July 2015, two changes are highly likely: (1) a new salary threshold for exempt employees in the range of $50,000 annually, and (2) an automatic annual increase in the salary threshold based on either a percentile of weekly earnings or an inflation index. 

Other changes that may be part of the final regulation include a more restrictive, quantitative duties test requiring that an employee spend more than 50% of his or her time on tasks deemed exempt, an increase in the compensation requirement for the highly compensated employee (HCE) exemption, and an allowance of non-discretionary bonuses or other incentive pay as an offset of up to 10% of the salary threshold. 

Practical Impact

• Fewer employees will qualify for exempt status. USDOL has estimated that some 5 million employees will need to be “converted” to non-exempt status.
• To preserve exempt classifications, employers will need to increase salary to meet the new salary threshold.
• For employees converted to non-exempt status, employers will need to develop a new compensation plan, include rate or method of pay, taking into account the possibility of overtime pay. 
• Possible redesign of job descriptions, job schedules, staffing, and wage/hour policies.
• Communication of the changes and the reason for the changes.
• Training or re-training of formerly exempt employees regarding time-reporting procedures, compliance with overtime rules, and adherence to rest and meal break requirements.
• Training supervisors how to manage, counsel, coach, and discipline newly non-exempt employees to comply with timekeeping and record-keeping requirements.

Attorney Involvement

Employers are strongly advised to conduct their classification analysis and conversion plans under the guidance of an experienced wage and hour attorney due to the complexity of potential issues and the availability of the attorney-client privilege to protect candid discussions involving legal advice and risk management.

Don’t Delay Planning

Most employers are faced with making some compensation changes and some employers will be faced with making hundreds of compensation changes. The USDOL’s aggressive timetable to get a rule in place well before this fall’s elections means that employers only have about three months to conduct an internal analysis of exempt positions, identify their options, and implement a plan to minimize negative impacts on employee relations, direct payroll costs, indirect administrative costs, and general operations.