Fair Labor Standards Act Update Increase in the Annual Salary Threshold by Scott Matthews
Continuing its challenge to the perceived misclassification of workers, the U.S. Department of Labor, through its regulation of the Fair Labor Standards Act ("FLSA"), has increased the minimum annual salary required to be paid for an employee to be considered exempt from the overtime requirements of the FLSA.
A. The Change in the Law
The FLSA requires that covered employees be paid overtime of not less than one and one-half times their regular rate of pay for any hours worked in excess of 40 in a workweek. Certain categories of employees, however, are exempt as "administrative", "executive" or "professional" employees. To be classified in such a category, in addition to performing the duties associated with one of these categories of employment, an employee must be paid an annual salary in excess of a set threshold. In May 2016, the DOL increased the annual salary level from $23,660 to $47,476. The rule also establishes a mechanism for automatically updating the salary and compensation levels every three years. The effective date of the rule is December 1, 2016, and the future automatic updates at three-year intervals will begin on January 1, 2020.
B. The Impact of the Modification will be Widespread
The DOL's rule is expected to significantly impact compensation practices of many employers throughout the nation. Estimates vary concerning how many employees currently treated as exempt will need to be reclassified as non-exempt and therefore entitled to overtime pay. By any measure, the rule will broaden the applicability of overtime pay to millions of workers. The Government estimates that it will apply to 4.2 million workers. Certain trade organizations have put the number at 13.5 million.
Increasing the wage threshold from $23,660 per year, or $455 per week, to $47,476 per year, or $913 per week, will undoubtedly shine an even brighter light on worker classification issues that have dominated employment law claims over the last several years. Determining whether a worker should be classified as an employee or independent contractor, and analyzing the duties performed by an employee to properly classify the employee as exempt or non-exempt, will take on heightened significance because of the costs, including unpaid overtime, associated with improper classification.
Other potential consequences include increased hiring to eliminate the need for non-exempt employees to work more than 40 hours per week, as well as raising the salaries of otherwise exempt employees to push them over the threshold and thereby avoid the overtime requirement.
Professional service firms that represent not-for-profit entities should pay particular attention to the new rule. In issuing its final rule, the DOL noted out that "[n]either the FLSA nor the Department's regulations provide an exemption from overtime requirements for non-profit organizations." This could result in financial strain for charitable organizations which may have to pay overtime to formerly exempt employees or, in the alternative, raise their employees' salaries above the new threshold to permit continued treatment of such individuals as exempt.
C. Recommended Course of Action
Human Resource professionals should audit the compensation levels of their exempt employees. At the same time, it would be prudent to review the duties performed by these exempt employees to ensure that they are properly classified, even if they are paid above the threshold. It is anticipated that the DOL will be increasing its investigation of exempt classifications in light of the revisions to the regulation.
Please do not hesitate to contact Scott R. Matthews at (212) 237-1025, or firstname.lastname@example.org, with any questions or comments.
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