Experts say now is the time for businesses to prepare for proposed changes to the overtime exemptions under the Fair Labor Standards Act.
President Obama has pronounced repeatedly it is time to “give America a raise.” Well, a raise seems imminent for many so-called “exempt” employees, in light of proposed changes to federal regulations governing overtime pay.
While the final ruling has not yet been published, hospitality industry employers now have an opportunity to conduct self-audits to review the exempt and non-exempt status of each one of their employees.
This might be a good time for companies to preempt potential penalties by working with employment and labor attorneys to ensure continuous Fair Labor Standards Act compliance and help human resource and financial managers consider how to optimize staffing and compensation under the proposed regulations.
Bracing for change
Last July, the Wage and Hour Division of the U.S. Department of Labor posted a “Notice of Proposed Rulemaking” to the public, signaling, among other things, a significant increase in the minimum salary requirement needed to “exempt” certain employees from being paid overtime wages after they’ve worked 40 hours in a given week.
If labor lawyers representing businesses weren’t already braced for these changes, in mid-March they learned they’re coming faster than expected. That’s when the Department of Labor sent its final rule revising “white collar overtime exemption regulations” to the White House Office of Management and Budget. Attorneys who follow this process believe the final ruling could be published as early as late spring 2016.
The business community pushed back at the regulation changes during the 60-day period of public comment, which ended last September; however, whether its concerns will be given consideration in the final ruling is yet to be seen. The labor law experts with whom I’ve spoken seem pretty sure the ruling will raise the minimum salary level for the “EAP” exemptions at the 40th percentile of weekly earnings for full-time employees, which is currently $970 per week or $50,440 per year.
Moreover, if the proposed changes come to fruition as expected, employers might need to check every year to ensure compliance with the annually adjusted 40th percentile salary.
The FLSA in review
As you likely know, the FLSA guarantees overtime pay at a rate of not less than one and one-half times the employee’s regular rate for hours worked over 40 in a workweek. You likely also know that a common exception to this rule is the exemption of executive, administrative and professional employees—known as the “EAP” or “white-collar” exemption.
For employees to be subject to the EAP exemption, and thus, ineligible for overtime pay, they generally must pass each of the following three tests with respect to their employment.
First is the “salary basis” test, under which the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variation in the quality or quantity of work performed. Second is the “salary level” test, under which the amount of salary paid must meet a minimum specified amount. And finally, there is the “duties test,” under which the employee’s job duties must primarily involve executive, administrative or professional duties as defined by Department of Labor regulations.
The “duties test” targets EAP employees for exemption. The executive employee is classified, in pertinent part, as one “whose primary duty is management of … a recognized department or subdivision thereof; who customarily and regularly directs the work of two or more other employees…” Additional details of each test are beyond the scope of this brief article; however, you should note, each of the above three factors must be met in order to qualify for the EAP exemption.
This is not the first time the Department of Labor has updated the FLSA overtime provisions. You might recall the last time was in 2004, when it revised the “salary level test.” Following that change, the minimum salary permitted wherein an employee could potentially be EAP-exempt was $455 per week, which annualizes to $23,660 per year for a full-year worker. As noted above, this threshold is likely to jump to $970 per week, with employers possibly bearing the responsibility to ensure compliance with the annually adjusted 40th percentile salary.
There might be simple solutions, but no easy answers
This huge proposed increase in the salary level minimum would affect employees in a supervisory capacity, particularly shift managers, such as front-desk managers paid a salary, rather than on an hourly basis.
Currently, such employees would likely qualify for the EAP exemption from overtime if they earn $455 per week or more. The new rule could present problems for hotel operators who employ such currently exempt employees at a salary level between $455 per week and $970 per week. There are a number of approaches to compliance under the proposed new rule, each with upsides and downsides.
For example, let’s say you have a previously exempt employee with an annual salary of $42,000, who often works up to 50 hours a week. You can simply give the employee a raise of $8,400, safely removing the employee from overtime eligibility for purposes of the salary-basis test.
On its face, this is a simple solution. If the employee meets the duties test, the employer need not track the hours worked by the employee, and business can remain FLSA compliant.
This solution creates other problems, however, in addition to a hefty increase in the cost of the position. For one, you have to ask how are other exempt managers, who are already earning $50,440+ per year at their current positions, going to respond? Automatic pay hikes can reverberate up the pay scale, as understood by employers who have had to adjust to minimum wage increases.
Another approach might be choosing to pay the employee an hourly wage that maintains his or her current income, and restrict the employee’s weekly hours to 40. This option avoids additional costs with respect to the position; however, you might need hire new employees to make up for the work not being done due to the fact that an employee, who normally worked 50+ hours per week, now can only work 40 hours per week.
As you can well imagine, these are just two of a number of approaches that offer solutions to compliance, but bring along operational complications.
Again, the take-home message is that senior managers need to work with their employment and labor legal attorneys to insure their businesses remain FLSA compliant in ways that make sense for their operations’ effectiveness, morale and profitability.
Barry Shuster JD, MBA, MSB, is an attorney, editor and interim chair and visiting associate professor at North Carolina Central University School of Business, Department of Hospitality & Tourism Administration, where he teaches courses in hospitality law & ethics and hospitality finance.
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