Exempt Employees and the Salary Threshold

by Kimberly A. Sarff
Quinn, Johnston, Henderson, Pretorius and Cerulo

If adopted, a proposed federal regulation will greatly impact employers with exempt employees making less than $50,440 annually.

Are you an employer that employs “exempt” employees—those who earn a salary each week regardless of the number of hours worked? Do any of those employees make less than $50,440 annually? If so, you should be aware of a proposed federal regulation that could take effect as early as next year and may double the salary-basis threshold for exempt employees. This article discusses the proposed rule; examines the potential impact it could have on employers’ budgets, worker classifications and workplace flexibility; and identifies smart planning tips for employers.

The Salary-Basis Test
Employees are typically classified as either “non-exempt” or “exempt.” Non-exempt employees are not exempt from the federal and state wage laws and are required to be paid minimum wage and overtime compensation for all hours worked in excess of 40 hours per week at a rate of no less than one and one-half times the employee’s regular rate. Non-exempt employees are typically paid by the hour. On the other hand, exempt employees are exempt from federal and state wage laws and do not need to be paid minimum wage or overtime compensation. Exempt employees are typically paid a salary.

Employers are not permitted to classify employees as exempt simply because the employer and/or the employee desire(s) to be classified as such. Rather, in order to be properly classified as exempt from wage laws, the employee must:

  1. Meet the “duties test” of a “white-collar” exemption, the most common being the executive, administrative, professional, computer and outside sales employees’ exemptions; and
  2. Be paid on a “salary basis” by regularly receiving a predetermined amount of no less than $455 per week ($23,660 annually), which may not be subject to reduction because of variations in the quality or quantity of the work performed. There are some exceptions to the salary-basis requirement for certain employees in particular professions, such as lawyers, doctors, teachers and others.

On March 13, 2014, President Barack Obama signed a Presidential Memorandum criticizing the level of the salary-basis threshold of $455 per week for exempt employees and directing the Secretary of Labor to update the federal Fair Labor Standards Act (FLSA) regulations.

The Proposed Rule
On June 30, 2015, the Department of Labor (DOL) issued its long-awaited proposed rule updating the FLSA regulations. The proposed rule has three major changes to the existing overtime rules:

  1. It more than doubles the threshold for the salary-basis test to $970 per week ($50,440 annually);
  2. It increases the “highly compensated” employee’s annual salary level from $100,000 to $122,148; and
  3. It includes a mechanism to automatically update the salary thresholds annually, which could be either a fixed percentage of the wages or tied to the Consumer Price Index.

The public was provided an opportunity to comment on the proposed rule from July 6, 2015 to September 4, 2015. The comment period has closed, and the DOL will now analyze the comments received. It is expected the DOL will issue the final rule sometime next year. It is also anticipated the increased salary threshold amounts will be adopted in the final rule.

Reaction to the Proposed Rule
The proposed rule has met with significant controversy. Proponents argue that the increase to the salary-basis threshold is long overdue. They contend the current salary threshold of $23,660 annually is below the poverty level for a family of four, and note that many exempt supervisors make less than the non-exempt employees they supervise because the exempt supervisors do not receive overtime, despite working the same or more hours than their non-exempt subordinates.

Opponents argue the rule will have a disproportionate effect on small businesses and employers located in rural locations. They also argue that automatically updating the salary-basis threshold each year will create uncertainty for employers’ annual budgets and result in hardship to employers who may not be able to sustain an increase of salary every single year.

Opponents also recognize that many employers will react to the rule by reclassifying their exempt employees as non-exempt employees, which they argue is accompanied by its own set of problems. Many exempt employees are professionals who are accustomed to making salaries and not clocking in or out or otherwise being monitored at work. Opponents also argue that reclassified employees will no longer have the workplace flexibility they previously enjoyed. In an effort to ensure more control over the amount of overtime being worked by a reclassified employee, employers will likely limit—or even eliminate—the time employees work after hours or remotely from home.

What Should Employers Do?
Although the rule has not yet been adopted by the DOL, it is wise for employers to begin planning now. Those who are able to increase the salary of their exempt employees to $50,440 should plan for the effect the increase may have on the companies’ future budgets. Employers who are unable to pay their exempt employees the increased salary threshold should consider reclassifying those workers as non-exempt (hourly) workers. When reclassifying employees, there are a number of important considerations:

  • New wage rate. Employers will need to determine the employee’s new hourly wage rate. Calculation of the new rate is not as simple as dividing their salary by 40 hours. Rather, employers will need to consider how many hours the employee works and how much overtime will be earned by the employee upon reclassification. If the employer is uncertain how many hours exempt employees currently work, he or she should consider tracking their hours now before the rule takes effect. Employers should consider seeking legal advice on this issue, as there are some salary options available for non-exempt employees if their job duties necessitate working irregular hours.
  • Analyze impact on benefits. Determine how a change in classification may impact the benefits received by the employees and adjust policies if necessary.
  • Tracking hours. Employers should ensure they have a mechanism to track all hours worked for non-exempt employees, including hours worked off-site or during non-regular hours.
  • Update overtime policies. Employers should update policies applicable to non-exempt workers to ensure the policies are clear that non-exempt employees: (1) must track their time and accurately record hours worked; (2) are prohibited from working unauthorized overtime; and (3) must report any hours worked during non-scheduled hours. Employers may also need to make adjustments to policies related to when the reclassified employee may work remotely or access work messages using his or her smartphone.
  • Train workers. Employers should train management and all newly reclassified, non-exempt employees about the updated policies and expectations.
  • Address morale issues. Sometimes exempt employees believe their importance is diminished by being reclassified as non-exempt employees. Assure reclassified employees they continue to be valued by the company.

Although the final rule has not been published and it is unclear exactly what new salary threshold amount the DOL will adopt (if any), it is prudent for employers to educate themselves about the proposed rule and begin preparing for implementation now. iBi

Kimberly A. Sarff is an attorney at Quinn, Johnston, Henderson, Pretorius and Cerulo, who counsels employers, companies, management and human resources personnel in all aspects of labor and employment law.

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