The "Final Rule"

What you need to know about the recent changes to the Federal Labor Standards Act (FLSA)

By Brian Martucci
Tuesday, June 28, 2016

This May, the U.S. Department of Labor announced a slew of big changes to the Federal Labor Standards Act (FLSA), the 70-some-year-old linchpin of federal labor law. According to a DOL release, the changes “[focus] primarily on updating the salary and compensation levels needed for [executive, administrative, and professional] workers to be exempt” from minimum wage and overtime pay protections.

The so-called Final Rule’s headline provisions include:

  • Setting the minimum salary level at which EAP employees are exempt at the 40th percentile of full-time salaried worker earnings in the lowest-wage Census-defined region (the South) — at present, $913 per week or just under $47,500 per year
  • Setting the minimum salary level for so-called “highly compensated employees” (HCEs) at the 90th percentile of full-time salaried worker earnings, currently about $134,000 per year
  • Establishing a “mechanism” for automatically updating wage and compensation levels in the above percentiles every three years, and ensuring that job duty requirements for exempt employees remain current and relevant

The Final Rule’s provisions go into effect on December 1, 2016. That means employers have about five months, give or take, to determine how they’re affected by the new rules and what they need to do to ensure compliance.

“Come December 1, currently exempt employees earning less than [about $47,500 annually] will be entitled to overtime if they work more than 40 hours per week,” says Megan Anderson, employment and labor law specialist at Gray Plant Mooty.

Per Anderson, employers have three main options for dealing with the Final Rule on a company-wide or employee-by-employee basis:

  1. If an employee truly has exempt duties and already makes close to the $913-per-week threshold, increase their salary. If the increase is sizable, feel free to add new duties: “Frame it as ‘you’re making more money, so here’s more responsibility,’” says Anderson.
  2. If the case for an employee’s continued exemption is shaky, make them non-exempt. Reduce or eliminate overtime for employees who occasionally work more than 40 hours per week by requiring advance approval for projected overtime work. If an employee regularly works well over 40 hours per week, consider restructuring their job, possibly by hiring a new part-time employee to take some of their duties.
  3. Keep their job duties, structure, and hours the same, and “reverse engineer” their compensation such that they’re likely to earn roughly the same amount as before after accounting for regular and overtime hours. Since this isn’t an exact science, it could result in a pay cut; to boost morale and reduce turnover, consider guaranteed compensation (perhaps enforced through year-end bonuses) for affected employees, at least for the first year or two.

More Than the Minimum?

The Final Rule’s coverage is nothing short of sweeping. It’s sure to affect thousands of Minnesota employers. That’s a challenge for said employers, and — frankly — a business opportunity for firms like GPM.

In Anderson’s telling, it’s also an opportunity. If you know the Final Rule will affect your business, and that you’ll need to devise a compliance strategy, why not take a broader look at your company’s labor practices while you’re at it?

Perhaps it’s time for a company-wide classification review. Do you have non-exempt employees performing exempt duties? Vice versa? What about contract employees — are you unintentionally classifying some part-time or outside workers as independent contractors, when their duties and obligations actually fall under the rubric of traditional employment?

Since he began his second term, says Anderson, “[President Obama] has been keen on addressing stagnant wages and other secular labor market issues.” He unilaterally raised the minimum wage for federal contractors, boosting thousands of low-wage workers’ take-home pay overnight; behind the scenes, he’s encouraged closer interagency cooperation. The IRS is now far more likely to call up the DOL if it discovers a potential wage law violation in the course of a tax audit, for instance.

So it’s never too late for a comprehensive classification review. In fact, sooner is better. This is not a situation in which it’s better to ask forgiveness than permission. For business owners looking to stay on the up and up, it’s best to do neither.