Changes to the white collar exemptions under the Fair Labor Standards Act (“FLSA”) are coming slowly.  Very, very slowly.  Back in May 2016, under the Obama Administration, the Department of Labor issued a Final Rule updating the regulations for the FLSA’s minimum wage and overtime executive, administrative, and professional exemptions.  That rule would, among other things, have increased the minimum salary required for most employees within these exemptions from $455 a week ($23,660 a year) to $913 a week ($47,476 a year).  In November 2016, a federal judge in Texas enjoined that regulation just nine days before it was to go into effect.

In July 2017, the Department issued a Request for Information seeking public comment on a whole series of questions relating to whether and how the Department should update the existing regulations, which have been on the books since 2004.  Those questions include such topics as whether and how to revise the salary threshold, whether to differentiate salary levels based on geographic or other criteria, and whether to even have a salary requirement at all.

The Department’s semi-annual regulatory agenda indicates that the current plan is to issue a Notice of Proposed Rulemaking regarding these exemption regulations in or about January 2019.  That date has slipped before, and it may well slip again.

Apparently feeling that it does not yet have sufficient information to be able to make an informed decision about what it should say in the proposed regulations—notwithstanding the more than 214,000 comments received to date in response to the 2017 Request—the Department has announced a series of five “listening sessions” to be held in September in Atlanta, Seattle, Kansas City, Denver, and Providence.  According to the Department’s press release, “[t]he Department plans to update the Overtime Rule, and it is interested in hearing the views of participants on possible revisions to the regulations.”

Employers interested in letting their views be known to the Department in connection with this rulemaking are may register for one or more of these two-hour sessions.  There is no charge to attend, but the Department requires registration.  Given the nature of this type of gathering, it seems unlikely that the Department will provide any insights into where the rulemaking may be headed.  Instead, the purpose seems to be for the public to express its views and for the Department to take note of those views.

If you are interested in attending, please click here for the Department’s registration link.

In May of this year, the U.S. Department of Labor (“DOL”) announced its final rule to increase the minimum salary for white-collar exemptions, effective December 1, 2016. With less than two months to go before that new rule takes effect, employers still have time to decide how to address those otherwise exempt employees whose current salaries would not satisfy the new rule, by either increasing their salaries or converting them to non-exempt status.

The New Salary Thresholds

Effective December 1, 2016, the salary threshold for the executive, administrative, and professional exemption will effectively double, increasing from $23,660 ($455 per week) to $47,476 ($913 per week). This increase is but one of the changes that goes into effect on December 1.

The total annual compensation requirement for “highly compensated employees” subject to a minimal duties test will also increase from $100,000 to $134,004. The salary basis test will be amended to allow employers to use non-discretionary bonuses and incentive payments, such as commissions, to satisfy up to 10 percent of the salary threshold. And the salary threshold for the white-collar exemptions will automatically update every three years to “ensure that they continue to provide useful and effective tests for exemption.”

On first glance, dealing with the increase in the minimum salaries for white-collar exemptions would not appear to create much of a challenge for employers—they must decide whether to increase employees’ salaries or convert them to non-exempt status. Many employers that have already reviewed the issue and its repercussions would likely disagree with the assessment that this is a simple task. The decisions not only impact the affected employees but also affect the employers’ budgets and compensation structures, potentially creating unwanted salary compressions or forcing employers to adjust the salaries of other employees.

In addition, converting employees to non-exempt status requires an employer to set new hourly rates for the employees. If that is not done carefully, it could result in the employee receiving an unanticipated increase in compensation—perhaps a huge one— or an unexpected decrease in annual compensation.

The Impact on Compensation Structures

For otherwise exempt employees whose compensation already satisfies the new minimum salaries, nothing need be done to comply with the new DOL rule. But that does not mean that those employees will not be affected by the new rule. Employers that raise the salaries of other employees to comply with the new thresholds could create operational or morale issues for those whose salaries are not being adjusted. It is not difficult to conceive of situations where complying with the rule by only addressing the compensation of those who fall below the threshold would result in a lower-level employee leapfrogging over a higher-level employee in terms of compensation, or where it results in unwanted salary compression. Salary shifts could also affect any analysis of whether the new compensation structure adversely affects individuals in protected categories. A female senior manager who is now being paid only several hundred dollars per year more than the lower-level male manager might well raise a concern about gender discrimination if her salary is not also adjusted.

The Impact of Increasing Salaries

For otherwise exempt employees who currently do not earn enough to satisfy the new minimum salary thresholds, employers have two choices: increase the salary to satisfy the new threshold or convert the employee to non-exempt status. Converting employees to non-exempt status can create challenges in attempting to set their hourly rates (addressed separately below).

If, for example, an otherwise exempt employee currently earns a salary of $47,000 per year, the employer may have an easy decision to give the employee a raise of at least $476 to satisfy the new threshold. But many decisions would not be so simple, particularly once they are viewed outside of a vacuum. What about the employee earning $40,000? Should that employee be given a raise of more than $7,000 or should she be converted to non-exempt status? It is not difficult to see how one employer would choose to give an employee a $7,000 raise while another would choose to convert that employee to non-exempt status.

What if the amount of an increase seems small, but it would have a large impact because of the number of employees affected? A salary increase of $5,000 for a single employee to meet the new salary threshold may not have a substantial impact upon many employers. But what if the employer would need to give that $5,000 increase to 500 employees across the country to maintain their exempt status? Suddenly, maintaining the exemption would carry a $2,500,000 price tag. And that is not a one-time cost; it is an annual one that would likely increase as the salary threshold is updated.

The Impact of Reclassifying an Employee as Non-Exempt

If an employer decides to convert an employee to non-exempt status, it faces a new challenge—setting the employee’s hourly rate. Doing that requires much more thought than punching numbers into a calculator.

If the employer “reverse engineers” an hourly rate by just taking the employee’s salary and assuming the employee works 52 weeks a year and 40 hours each week, it will result in the employee earning the same amount as before so long as she does not work any overtime. The employee will earn more than she did before if she works any overtime at all. And if she works a significant amount of overtime, the reclassification to non-exempt status could result in the employee earning significantly more than she earned before as an exempt employee. If she worked 10 hours of overtime a week, she would effectively receive a 37 percent increase in compensation.

But calculating the employee’s new hourly rate based on an expectation that she will work more overtime than is realistic would result in the employee earning less than she did before. If, for instance, the employer calculated an hourly rate by assuming that the employee would work 10 hours of overtime each week, and if she worked less than that, she would earn less than she did before—perhaps significantly less. That, of course, could lead to a severe morale issue—or to the unwanted departure of a valued employee.

A version of this article originally appeared in the Take 5 newsletter Five Critical Wage and Hour Issues Impacting Employers.”