USDOL Proposes Significant Increase in the Salary Threshold for Exempt Employees – How Will it Affect Your Business?

On August 30th, the U.S. Department of Labor (DOL) issued a long-awaited proposed rule that if adopted, will substantially expand the ranks of workers eligible for overtime payments for work in excess of 40 hours, as required by the Fair Labor Standards Act (FLSA).

Under present FLSA regulations, certain “white collar” workers who meet minimum salary requirements and perform specified duties may be classified as “exempt” employees ineligible for overtime.  The current salary threshold to qualify for the white collar exemptions is $35,560 annually, and $107,432 for the “highly compensated employee” exemption.  The proposed rule would increase that minimum salary threshold to $55,068 per annum, and $149,988 for highly compensated employees.

How Businesses Will Be Affected

Should the proposed rule become final, it is estimated that 3.6 million employees previously eligible for exemption will automatically be reclassified as non-exempt employees eligible for overtime.  Employers with positions classified as exempt that fall below the new threshold will have two alternatives.  If employees are expected to work significant overtime on a regular basis, it would be prudent to increase salaries to meet the $55,068 threshold.  However, for those positions where significant overtime is not anticipated, employers may want to accept the loss of the exemption, convert these workers to hourly employees, and undertake efforts to control the amount of overtime worked by these new non-exempt workers.  Regardless of the option chosen, employers may face substantial increased labor costs for increased salaries or overtime payments.

Employee Morale Considerations

In addition to a purely economic analysis, employers should consider how the transition from exempt to non-exempt employees will affect worker morale.  Exempt salaried employees are considered “professionals” who are not required to punch time clocks and are not penalized for late arrivals or early departures.  The transition of a professional employee to an hourly worker whose hours will now be monitored by management is bound to prompt dissatisfaction among affected employees.

A Unique Opportunity?

Misclassification of employees as exempt is a common phenomenon, typically because the employee does not meet the duties test to qualify for exemption.  However, reclassification in these situations is fraught with risk because misclassified employees may seek to recoup overtime payments for the period when they were misclassified as exempt employees.  If the DOL’s proposal is implemented, employers have a unique opportunity to properly classify workers under the cover of the new salary requirements.

What Should Employers Do Now?

If the proposed rule is adopted, it is likely to face legal challenges similar to those that undermined the Obama administration’s attempt to increase the salary threshold in 2016.  Nevertheless, employers should undertake an assessment of all exempt positions to determine if they will meet the proposed salary threshold as well as the duties tests that remain unchanged.  This will enable employers to take prudent and swift action to minimize the adverse impact to the business if the rule is ultimately implemented.

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