Waiting is the hardest part.
Ever since the Department of Labor issued its proposal to substantially increase the minimum salary level needed to classify an employee as an exempt executive, administrative or professional employee, employers have been asking when the new rules will take effect. This is not an academic question: many organizations have long and involved budget and compensation processes, and need significant lead time to address major changes. Previously, the Department made it clear that it intends to issue final rules sometime in 2016. The volume of comments taken in by the Department after final rules were issued (over 264,000) caused many to speculate that final rules would be delayed. Well, it looks like that speculation was well-founded.
According to the Wall Street Journal, Solicitor of Labor Patricia Smith stated during a panel discussion at the the American Bar Association’s recent Labor & Employment Law Conference in Philadelphia that the Department is unlikely to issue final rules until “late 2016.”
So what does this mean for employers trying to figure out how to deal with the new rules? Here are some thoughts:
1. Employers may not have much time to comply once the final rules are issued.
When the Department of Labor last made significant changes to the white collar exemption regulations in 2004, the final rules were published on April 23 and took effect four months later, on August 23, 2004. This time around, employers should be prepared to act with as little as 60 or even 30 days’ lead time. With presidential elections in November 2016, it is a fair bet that the Department will want any final regulations to take effect before a new president takes office, particularly if the winning candidate is a Republican. That being the case, if the final rules are issued in “late 2016,” employers may have only a month or two to comply.
2. Employers should assume that the minimum salary level will be going up to approximately $970 per week for 2016, with annual increases thereafter.
The DOL’s proposed rules increase the minimum weekly salary for exempt employees from $455 per week to a weekly salary at the 40th percentile of weekly earnings for full-time salaried workers, based on Bureau of Labor Statistics data. For 2016, the DOL has projected that this number will be $970 per week, which works out to about $50,440 per year. For political reasons, it seems somewhat unlikely at this point that the final rule will increase the minimum salary level above the 40th percentile, although that is not impossible. Conversely, it is possible that political pressure from businesses and other employers may case the DOL to fall back to a somewhat lower number. Until the DOL tips its hand, the best recommendation we can give to employers is to assume that $970 will be the applicable minimum salary, but to plan in advance what they will do if the totals come in higher or lower than the minimum.
3. Be prepared for the unexpected.
While the DOL’s proposed rules don’t change much in the current regulations other than the minimum salary level, the final rules may contain more surprises. For example, the final rules might contain changes to the job duties tests for executive, administrative and professional employees. The DOL asked for comments on some aspects of the current duties tests. It presumably would not have done so if it wasn’t at least contemplating some changes. The final rules could also contain other surprises – at this point we simply don’t know.
4. Start your compliance planning now.
The combination items 1, 2 and 3 above means that employers need to start thinking now about how they will deal with the final rules once they are published.
In many cases, this may mean re-classifying employees as non-exempt. While it may offer the promise of additional overtime pay for some, this change may not be popular with all employees. Many exempt employees like being treated as exempt, both because of the status they feel it conveys and because it offers a level of flexibility in their hours that non-exempt employees may not enjoy. Determining how your workforce is likely to react to these changes and figuring out how best to temper or deal with those reactions may be a significant undertaking.
In other cases, employers may elect to increase salary levels to meet the newly-established minimum, whatever that turns out to be. While straightforward in individual cases, we’ve talked to many clients who are struggling with how to accomplish this accross an organization without either blowing away the compensation budget or creating severe salary compression at the lower levels. We’ve found that this is a particular concern for at least certain colleges and universities and other nonprofits, many of which have exempt administrators with relatively low salaries. While reclassifying some of these employees as non-exempt may be an option, others keep irregular hours or work significant overtime during at least certain portions of the year (e.g., around sports and recruiting seasons) that make reclassification a difficult proposition. While smaller employers may be able to make these adjustments relatively quickly, larger and less flexible organizations may need significant lead time to decide how to deal with these issues.
Finally, the new exemption rules may prompt some employers to look at other actions such as reductions in force, reorganization and consolidation of positions, or outsourcing certain functions to vendors. Again, any of these changes may require significant lead time to implement.
Whatever an employer’s response to the new rules, advance planning will be key.
5. Use the new rules as an opportunity to clean up potential problems.
Part of planning to comply with the new rules should be ensuring that you are in compliance with the current regulations. Even if the final rules don’t change anything other than the minimum salary for exempt employees, it is a fair bet that they will prompt a spike in litigation if only because they draw attention to wage and hour issues. Smart employers will stay ahead of that curve by making sure that their existing policies and practices are in compliance. The upcoming changes may also give employers something of a window in which to make changes to reduce compliance risk without obviously signaling that there is a current problem.