Beginning on December 1, 2016, employees who are salaried and classified as exempt administrative, professional or executive employees must make at least $922 dollars per week or $47,476 per year to remain exempt from the overtime requirements of the Fair Labor Standards Act, in addition to meeting the duties requirements of the exemption. This regulatory change more than doubles the current salary threshold of $455 per week and is likely to significantly increase the cost of doing business. While many employers are preparing for the new rules by identifying specific positions that will be immediately affected by the change, there are consequences of the new regulations that reach far beyond the decision to increase a salary or convert an employee to a non-exempt classification.
Employees who are classified as exempt administrative, professional, or executive employees enjoy the predictability of receiving a salary for their work, regardless of the number of hours worked. However, they are not entitled to receive overtime pay for hours worked over 40 in a workweek. Having salaried employees provides some cost predictability to a business because the payroll for those employees does not fluctuate dramatically from one pay period to the next. Such a dramatic increase to the salary threshold requires affected businesses make a difficult decision; either raise certain salaries to the requisite level and preserve the exemption or convert the position to non-exempt, hourly and pay overtime as it is incurred. Either decision comes with a host of downstream consequences that businesses should take into consideration before making a final decision.
One consideration is whether the employees in an affected classification will perceive being converted to non-exempt, hourly employees as a “demotion.” Although exempt employees largely benefit from being paid overtime, being paid a salary is perceived by some as carrying with it a higher status. Some employees may not react well to the change because of this perception. If an employer makes the decision to convert one or more employees to non-exempt, hourly status, it should also consider implementing a thoughtful communication strategy and use the change as an opportunity to talk with employees about their concerns.
When converting employees to a non-exempt classification from an exempt classification, it is also important to ensure that those employees understand the employer’s overtime policy and adhere to it. Keep in mind that many exempt employees are not accustomed to keeping track of their time, accounting for breaks, or seeking approval for overtime work. For some, checking work email or taking phone calls outside of business hours is a regular and normal occurrence that will now need to be accounted for in the employee’s time. As part of any conversion, training employees at all levels regarding your timekeeping policy and enforcing that policy is critical.
If, on the other hand, an employer makes a decision to increase the salaries of at least some of the affected positions in order to preserve the exemption, it is critical to analyze how those changes will affect the overall balance of compensation in the organization. For example, if the salaries of lower level managers are increased to meet the new thresholds, this action will impact the difference in pay between more junior and more senior employees. Such changes often impact the morale of more senior members of your team. Additionally, from an equal employment opportunity standpoint, businesses should examine whether changes in compensation disproportionally impact a specific protected class in an adverse way. For example, if salary increases disproportionately advantage men more than women, you may have a pay equity issue to address.
All of these concerns demonstrate that the impact of the new salary thresholds extends far beyond additional overtime payments or the increased costs of salaries. Employers also should take into account the costs of training, revising timekeeping and other polices, and possibly increasing or adjusting the pay of some positions that may not be directly impacted by the regulation changes. It is also important to document the reasons behind compensation and classification decisions in an organized way. Taking these actions will help businesses reduce potential liability for wage and hour or other claims and will help the organization make consistent decisions over time. A long-term strategic approach to adjusting classifications and compensation is even more critical in light of the fact that the salary thresholds may increase by the rate of inflation every three years.
While the new salary thresholds seem daunting and costly, thinking strategically about immediate and residual impacts of compensation and classification decisions will help your business get ahead of the regulations and maintain a competitive edge.
About the author: Nichole Atallah is an associate with PilieroMazza in the Labor and Employment Group. She may be reached at firstname.lastname@example.org.