At the recent 2016 American Bar Association’s midwinter meeting, Solicitor of Labor Patricia Smith announced that the final amendments to the Fair Labor Standards Act’s (FLSA’s) so-called “white collar” exemptions will be published in July 2016. The Department of Labor (DOL) expects the regulations will become effective 60 days after publication and is committed to them being effective by the end of 2016.
The beginnings of these changes date back to March 13, 2014, when President Obama issued a memorandum to the Secretary of Labor indicating that the “regulations regarding exemptions from the Act’s overtime requirement, particularly for executive, administrative, and professional employees (often referred to as the “white collar” exemptions) have not kept up with our modern economy. Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage.” President Obama then issued a Presidential Directive to “propose revisions to modernize and streamline the existing overtime regulations.”
On June 30, 2015, the DOL announced proposed changes to the salary levels required for exemption status under Section 541 of the FLSA. As part of the revision process, the DOL provided a 60-day window of opportunity for the public to submit formal comment. Comments were due on September 4, 2015, after which, the DOL reviewed and incorporated changes in an effort to finalize the regulatory changes so that they can take effect in 2016. It is estimated that approximately 5 million workers will be impacted by these changes.
There are several key changes that may impact a financial institution:
- The minimum salary level considered to be a white collar position will increase from $455 per week ($23,660 annually) to $970 per week ($50,440 annually) for full-time, exempt, salaried employees.
- The threshold for highly compensated employees will increase from $455 per week and $100,000 annually to $122,148 annually.
- The new thresholds will be indexed automatically each year to a preset percentile to ensure the thresholds keep pace with inflation.
The existing duties tests for determining exemption status do not contain proposed changes at this time. It remains unclear whether employers will be allowed to include nondiscretionary bonuses to satisfy the new standard salary test. It is hard to argue with the intentions of the regulatory rule change. The proposed changes are designed to reduce the opportunity for employers to take advantage of employees under the pretext of exemption status; to increase wages; to update the overtime protections provided to employees; to address the shifting landscape of how and where people work; and to simplify the regulations to increase understanding and application of the law.
However, the proposed rule changes, if put into effect, may have some unintended consequences.
First, reduction in pay. If an employer cannot afford to increase the salary level to $50,440, the employer may decide to put into effect a pay practice that may not work to the advantage of an employee. The employer may change an employee’s exemption status to nonexempt and then “back into” an hourly rate for the employee that takes into consideration an estimated number of hours in excess of 40 each workweek. This process may result in a lower wage being paid to an employee. In this situation, the employer will be in compliance with the new regulation under the FLSA, but the employee will not receive an increase in compensation and, in some situations, may experience a reduction in compensation.
Second, organizational restructure. An employer may eliminate a tier of supervision and management to mitigate the risk of increased personnel expenses and will identify “lead” employees in non-exempt roles to assume related supervisory duties with minimal increases to the regular rate of pay.
Third, decreased flexibility. In today’s highly mobile and tech savvy environment, exempt employees are able to work anytime and anywhere, which enables employees to balance work and life. Flexibility begins to blur the lines of the workday: i.e., when does the day start, when does it end, and are meal periods unpaid? Nonexempt employees are required by law to record all hours worked to ensure an employee is appropriately compensated for time “suffered or permitted to work.” Employers may choose to reduce flexibility in order to adhere to new administrative requirements.
Fourth, decreased employee morale. Exemption status in many organizations is a sign of prestige. When an employee loses his/her exemption status, there is a sense of loss, betrayal, and embarrassment that accompanies the change in status. Employees often feel micromanaged because they are now required to record all hours worked, to be mindful of when and how they work, and to limit the types of professional development activities that they are able to engage in because of the constraints of a 40-hour workweek and an employer’s policy on limiting the amount of overtime that can be worked.
Although the final rules have not yet been published, it is important to give consideration to the changes and begin the planning process to ensure appropriate classification of employees and payment of wages for all Bank staff.
Actions to Take:
- Review all position descriptions to ensure they are an accurate representation of the role and responsibilities. Resolve any titles that may be over or understated.
- Apply the executive, administrative, and professional exemption duties tests to determine or verify the exemption status. (See: http://www.dol.gov/whd/overtime/fs17a_overview.htm.)
- Pay particular attention to the exemption status of the financial institution’s mortgage loan originators.
- Conduct a compensation analysis on all exempt employees to determine which positions and individuals may fail the new salary test. Consider base and nondiscretionary bonuses separately to determine total annual cash compensation.
- Evaluate the financial impact of adjusting compensation to the new minimum salary level.
- Discuss the financial institution’s compensation philosophy and actions to be taken to address salary compression issues that may surface for impacted positions.
- Alert executive and senior leadership of the proposed changes and the potential impact on the financial institution.
- Think through communications to employees to ensure they understand the changes to their compensation structure, and anticipate employee reactions so you can best tailor your message regarding the required changes.