Hunton Retail Law Resource

Under the Fair Labor Standards Act’s (“FLSA’s”) white-collar exemptions, an employee must meet both a duties and a salary basis test in order to be exempt from overtime requirements. Currently, the salary basis test requires that the employee receive at least $455 per week in salary. However, under a recent Department of Labor rulemaking, the weekly salary amount is set to more than double to $913 per week effective December 1, 2016. Thus, employers must ensure that any white-collar-exempt employee making less than $913 per week either (1) receives a salary increase to at least $913 per week to continue the overtime exemption or (2) is reclassified to non-exempt and receives overtime when working more than 40 hours in a week. 

Earlier this week, various states and employer interest groups filed a series of lawsuits challenging the new rule. It is too early in the litigation process to evaluate the likelihood of success in those lawsuits. More importantly, there is no certainty that a favorable determination can be achieved before the December 1 effective date. Therefore, notwithstanding the pending litigation, the time to prepare is now (if not months ago). For those employers who are just getting started, here are a few strategies to aid you in your decision-making process.

On the surface, choosing between these two options may seem relatively easy. In reality, however, the decision is complicated and requires a detailed employee-by-employee analysis. Even once this initial decision is made, there are a whole host of administrative and employee morale considerations that must be tended to in advance of the December 1 deadline.

To properly analyze the issue, an employer should first compile a list of all individuals impacted by the new salary requirement, their current salaries and their estimated weekly hours of work. We use the word “estimated” because most employers do not have an accurate record of exempt employees’ hours of work because the FLSA does not require employers to track those hours. However, an estimate of hours is a critical part of this analysis, and employers must take the time to ensure that their estimates are as accurate as possible.

With this information in hand, the employer must then calculate the cost associated with increasing the employee’s salary to the new $913 level and then compare that cost with the costs the employer will likely incur if it chooses to pay the employee overtime rather than increasing the employee’s salary. As part of this analysis, the employer should consider compensation and scheduling alternatives that could mitigate the financial impact of paying any newly non-exempt employee overtime.

There are three main compensation alternatives to consider:

• Decrease the employee’s weekly salary so that once anticipated overtime premiums are paid, the employee’s gross pay remains the same.
• Convert the employee to an hourly rate. Employers should try to set the hourly rate so that once overtime premiums are included, the employee receives the same gross pay as he or she received from the salary. The following formula is helpful in identifying the correct hourly rate: Salary/(40+(OT Hours x 1.5)).
• Use the fluctuating workweek method of overtime. Under that method, the employee receives a salary that covers all hours of work (regardless of how few or how many) and then receives overtime using the following overtime rate: (Salary/Hours Worked) x .5. The benefit of this method is that the overtime rate is roughly two-thirds lower than the default method for calculating overtime on salaries. The downside of this method is that there are strict requirements for using the method, many of which require weekly oversight. The key point is that an employer should not attempt to implement a fluctuating workweek pay plan without the assistance from experienced legal counsel.

In terms of scheduling alternatives, there are a number of options to consider:

• Identify inefficiencies and job duties that can be eliminated or assigned to others so as to limit the number of overtime hours subject to overtime compensation.
• Combine two jobs into one, which means the employer would only have to increase one employee’s salary, not two.
• Alternatively, hire additional employees to do the work so that employees do not work overtime.
• Change the workweek measuring period so as to better manage the employee’s overtime hours.

In addition to analyzing the costs associated with the two options and the various compensation and scheduling alternatives, the employer must also factor in employee morale impacts. Most exempt employees will view a reclassification to non-exempt as a demotion, particularly because the employee will have to begin tracking his or her time. The employer must help the employee understand that the reclassification is not a demotion and explain why the change is actually to his or her benefit. Similarly, the employer must be on the lookout for issues of pay parity – supervisors and subordinates receiving similar hourly rates or salaries as a result of an increase in salary and/or a reclassification to hourly status. Ultimately, how the employer communicates to employees about the change is just as important as the change decision itself.

Finally, the employer must consider the administrative impacts of the contemplated change. Timekeeping, payroll and other systems and practices that are impacted by the change will need to be evaluated and/or modified. The employer should also train the impacted employees and their supervisors regarding the various policies that now apply because of their newly non-exempt status, including policies regarding tracking time, meal and rest periods, off-the-clock work and travel time. All of these things take time, and December 1 is just around the corner.