Prepare Now for New FLSA “White-Collar” Exemption Regulations

The U.S. Department of Labor’s proposed regulations dramatically reducing the number of employees who qualify for the white-collar overtime exemptions to the federal Fair Labor Standards Act are expected to be announced publicly in June. So far, no specifics have been provided by USDOL as to what the proposed regulations will say, but two changes are widely anticipated: (1) a new annual salary threshold in the range of $50,000 (more than twice the current salary threshold), and (2) a quantitative primary duty test requiring an employee to spend more than 50% of his or her time on tasks deemed exempt. We also believe the proposed regulations will preserve or increase the current complexity, subjectivity, and vagueness as to exempt criteria, contrary to President Obama’s directive to the Secretary of Labor to “simplify the regulations to make them easier for both workers and businesses to understand and apply.”

In any event, virtually all employers, large and small, will incur significant time and expense evaluating whether job positions currently classified as exempt still qualify and, if not, what actions to take. Employers should immediately initiate a proactive review of their exempt positions even before the specifics of the proposed regulations are announced.

In many cases, the potential increase in labor costs will be less significant than the hidden costs of additional recordkeeping, more complicated payroll administration, difficult employee relations issues, increased claims and litigation, scheduling complications, expanded training, and other human resource considerations.

Current Status

• Proposed regulations, which have not been made public, were submitted to the White House OMB Office of Information and Regulatory Affairs (OIRA) on May 5, 2015.
• USDOL anticipates that the OIRA review will be completed sometime in June.
• Once OIRA completes its review, USDOL will publish the proposed regulations for comment.
• How long will the public comment period be? Brief. A full and comprehensive public comment process cannot be accomplished in less than 120 days. However, employers are apprehensive that USDOL will not allow a comment period of more than 60 days.
• At the end of the comment period, USDOL will review the comments and publish its final regulations. Given the USDOL’s “fast-track” leanings, the final regulations will likely appear in 4Q CY2015.
• Will there be an implementation period? Yes, but likely short. It is believed that USDOL will “fast-track” implementation to begin in the 1Q CY2016.
• Will Congress block the new regulations? Highly unlikely. There is no indication currently that key members of Congress are interested in taking on this issue. Most major employer associations have other labor and employment law matters that are higher on their priority lists.
• Will there be litigation seeking to overturn or enjoin the regulations? Chances are remote at best. No legal theories have been publicly articulated and no potential plaintiffs have come forward.

Practical Impact

• Fewer employees will qualify for exempt status. Food service and retail trades, in particular, will be impacted negatively.
• It will be especially difficult to make determinations as to positions that are within +/- 10% of the new salary threshold and positions where currently exempt employees perform non-exempt duties to any significant degree.
• Remember: The USDOL regulations apply only to potential claims under the federal FLSA.
• If state law places more restrictions on salary basis or exempt duties than the proposed USDOL regulations, the employer must comply with state law even though it may be in compliance with the new USDOL regulations.
• The publicity generated by the nationwide impact will cause more exempt employees to critically question their classification status and bring administrative claims or lawsuits.
• If there is a collective bargaining agreement, employers will need to comply with the CBA in classifying or changing pay/benefits. Also, employees reclassified as non-exempt may become part of the bargaining unit.

Strategic Considerations for Maintaining Exempt Status

• Increase salary to meet new salary threshold. Cost/benefit analysis.
• Revise job descriptions to demonstrate that an individual’s primary duty involves actually performing exempt duties more than 50% of the time.
• Make sure that, in practice, exempt employees are actually performing exempt duties more than 50% of the time.

Strategic Considerations Concerning Reclassifications

• No employer is required to guarantee that an employee will receive overtime work.
• No employer is required to pay an employee more total wages as a non-exempt employee than what the employee was making as an exempt.
• To mitigate increased labor costs, employers may implement changes to bonuses, benefits, work schedules, and other measures.
• In setting an hourly rate for a newly non-exempt employee, the employer has options in how to compute the new hourly wage for formerly exempt employees. As a legal matter, employers can configure the hourly wage and the anticipated overtime pay such that the employee’s total compensation is approximately the same as when the employee was paid on a salary basis.
• Formerly exempt employees will often see reclassification as a “demotion” and resent being converted to hourly pay. Communications with employees about the conversion and, possibly, continuing to pay on a salary basis, while implementing a fluctuating work week program for overtime, may be a necessary employee-relations device.
• A major administrative burden and employee-relations issue will be the need to train new non-exempt employees on filling out timekeeping records, complying with meal/rest break requirements, restrictions on working outside normal work hours, travel time, and other compensable time issues.

Attorney Involvement

Employers are strongly advised to conduct their classification analysis 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

The USDOL final regulations on FLSA white-collar exemptions will go into effect very quickly in the near future. Employers need to begin their internal analysis of exempt positions now and identify their options to minimize negative impacts on employee relations, direct payroll costs, indirect administrative costs, and general operations.