By Stephen T. Mealor

As most employers know by now, the U.S. Department of Labor (DOL) issued final regulations earlier this year that increased the salary level test for FLSA exempt status from $455 per week to $913 per week. This increase will take effect December 1, 2016. Subsequent increases will take place every three years, beginning January 1, 2020.

Employers will need to assess who among the staff are (a) protected under the new law and (b) work more than 40 hours a week. Armed with this information, the employer can best tailor a plan to reduce the impact of the new law.

For instance, if an employee already earns close to the $913 threshold and necessarily works long hours, it would be less costly to give that employee a raise to just over the threshold. The DOL asserts that its new rules help in this regard by allowing employers to satisfy as much as 10 percent of the standard salary level requirement through the payment of nondiscretionary bonuses and incentive pay (including commissions), if these incentives are paid at least quarterly.

Employers should keep in mind, however, that these raises and incentives can only be a temporary fix because these higher-paid employees will become overtime eligible when the threshold rises in 2020. Also, an employer cannot count on using the incentives to elevate an employee’s salary above the threshold because there is no guarantee that the employee will earn the incentive.

If an employer knows that its employees will accrue a certain amount of overtime pay on a regular basis, the employer might offset its costs by lowering their base pay. The DOL has stated that, on average, this tactic will still result in an overall increase in pay for employees.

Of course, if the employees do not work overtime, the new law will not have much of an impact.  If the employees accrue a small amount of overtime as a whole, or only a few employees work overtime, the employer should explore how to prevent overtime in the future. For many, all that will be needed is to communicate the employer’s expectations of a 40-hour workweek to the newly protected employees. In some cases, however, the employer will need to pursue time-saving strategies, such as upgrading technology. In other cases, the employer should consider implementing fluctuating work weeks and other flexible schedules to maintain 40-hour work weeks.

The time and investment required to prevent overtime may be costly at first, but employers should adjust over time. In the end, the rule will produce more headaches than catastrophes.

Though a 2009 study published in Personality and Social Psychology Bulletin demonstrated that employees paid on an hourly basis tend to be happier,[1] salaried employees may not enjoy losing some of their freedom as their employers try to account for employee time and increase efficiency.

In a consolidated lawsuit filed before a U.S. District Court in Texas, 21 states and more than 50 companies challenge the new FLSA regulation on a number of different grounds, ranging from the constitutionality of the U.S. government imposing wage requirements on states to whether the Department of Labor must engage in formal rulemaking procedures before raising the exemption threshold in 2020.  As of yet, it is too early to tell how the lawsuit—or the Presidential election, for that matter—will affect employers. What is known is that the new rule will take effect December 1, long before the lawsuit’s resolution.

 

Stephen T. Mealor is a civil litigation attorney in Spicer Rudstrom’s Knoxville, Tenn. office, who focuses on motions and appeals in the areas of employment practices, consumer law, civil rights, property and casualty litigation and real estate and construction litigation. He is a graduate of the Washington and Lee University School of Law and received his undergraduate degree from Wake Forest University.

[1] DeVoe et al. When Is Happiness About How Much You Earn? The Effect of Hourly Payment on the Money–Happiness Connection. Personality and Social Psychology Bulletin, 2009; 35 (12)