How FLSA’s Proposed Overtime Exemptions Affect the Griswolds
Getting on top of the complexities in proposed rule changes that will impact 2016 and beyond.
In the movie National Lampoon’s Christmas Vacation, Clark Griswold went off on one of the all-time greatest rants when he received his Christmas “bonus.” Instead of a sizable check to cover the deposit he had already put down on a new pool, Mr. Shirley, his boss, gave Clark and his fellow employees a one-year membership to the Jelly of the Month Club.
While Cousin Eddie described the membership as “the gift that keeps on giving the whole year,” Clark and the other employees weren’t too happy with it. Relying on what had happened in past years, Clark and his co-workers had been counting on a Christmas bonus as part of their incomes, which was especially true for Clark because of all the extra time and effort he had been putting towards a “non-nutritive cereal varnish” product.
Mr. Shirley’s decision to get rid of the Christmas bonuses backfired. Aside from the risk of a ridiculous kidnapping at the hands of Cousin Eddie, Mr. Shirley also faced the risk of returning to an office full of very disgruntled employees. He likely would have found it hard to focus on promoting Clark’s cereal varnish on the tradeshow circuit. So Mr. Shirley probably saved himself a lot of stress and headaches by quickly reinstituting the Christmas bonuses (with Clark getting an extra 20 percent).
For real-life employers, compensation decisions also present many challenges, which is particularly true when those decisions may be adverse or at least perceived as adverse. For example, currently there are some changes in the works regarding the Fair Labor Standards Act’s (FLSA) overtime exemptions. Because of the nature of the proposed changes, employers may be facing difficult decisions about certain employees’ compensation and how to relay those decisions to the affected employees.
Earlier in 2015, the Department of Labor (DOL) gave notice that it was considering significant changes to the rules regarding the FLSA’s overtime exemptions. While the changes to the rules have only been proposed at this point, it seems very likely that at least some changes are coming in 2016. Whether those changes will become effective in 2016 or not until 2017 remains to be seen.
The potential impact of the proposed rules is best demonstrated in reference to the current rules. For example, if we apply the current standards to Clark Griswold and his co-workers, they would find themselves exempt from the FLSA’s overtime provisions and, therefore, not entitled to overtime pay if they are paid a salary of at least $455 per week, or a little more than $23,000 per year, as long as they also meet the professional, administrative, or executive “duties tests” and other requirements. Based on details in the movie, Clark and some of his co-workers might even fall within the alternate exemption for the “highly compensated employee”—an executive or professional employee paid a salary of at least $100,000 per year.
These current standards have been in place for several years, and the standards have been changed only a handful of times since the FLSA was first enacted in 1938.
Under the changes proposed by the DOL in 2015, the minimum salary level required to fall within the white-collar exemptions may be more than doubled. The proposed rule would require an employee to be paid a salary of at least $970 per week to meet the minimum salary level required to fall within the white-collar exemptions. The result is that many more workers (i.e., those making salaries between approximately $23,000 and $50,000 per year) will be eligible for overtime as nonexempt workers.
As to the “highly compensated employee” exemption, the proposed changes would raise that threshold significantly, too. By proposing to raise the minimum required salary from $100,000 to approximately $122,000 for this exemption, the DOL again would bring potentially more workers within the category of nonexempt.
The DOL’s proposed changes also include a provision that would automatically increase these salary levels annually. The likely result of such a provision, again, would be an increase in the number of nonexempt workers each time the salary levels are updated.
The DOL did not propose changes to the duties tests used to determine whether employees fall within the professional, administrative, and executive white-collar exemptions. However, it asked for comments regarding the possibility of changing those tests, in addition to comments regarding the changes actually proposed. Potential changes to the duties tests likely could create even more headaches for employers than changes to the salary level thresholds alone, as changes to those tests also could result in more nonexempt workers. Employers would need to analyze the positions of “working supervisors” or other employees who do a combination of exempt and nonexempt duties.
While the changes are just proposals at this time, many proactive employers already recognize that there are certain actions they can take now. Employers can begin identifying positions that might be affected by such changes before hiring for them. Those who want to hire someone at $30,000 or $40,000 per year and make them salaried exempt need to be aware that the exempt designation will not have a very long shelf life and they will be confronted quickly with either needing to give the employee a sizable salary increase or convert them to hourly. Under that scenario, an employer might find it better to make the new hire hourly in the first place, in large part to avoid a difficult compensation-related discussion with the employee possibly just months down the road.
Employers also can consider whether it might be best to reclassify other current salaried exempt employees in light of the potential new rules. Paying at an hourly rate with the possibility of overtime may be more attractive than paying what could be a higher salary in addition to possible overtime.
For employers considering the change from exempt to nonexempt for certain positions, they also can consider how to deal with potential increased costs associated with overtime pay for newly nonexempt workers. Employers may want to consider putting a limit and conditions on overtime and even imposing discipline where employees fail to abide by such limits and conditions. (The employer will still be liable for the overtime pay, however.) If the overtime can’t be avoided based on the nature of the business or other factors, employers likely will want to begin budgeting now to avoid potentially being caught off-guard next year.
Moreover, employers can give advance consideration to how they might want to explain any changes to affected employees. The idea of going from being paid a salary to having to clock in and out while being paid on an hourly basis may not be a welcome change for some employees. Such a change could take some getting used to (not to mention the practical difficulties employers might face in implementing them).
And that brings us full circle to the backlash that Mr. Shirley experienced. Compensation decisions can be difficult, and when they are adverse to employees (or perceived as adverse), such decisions typically need to be communicated in a tactful and thought-out manner. That is just one of the many reasons that employers already have begun analyzing and working on potential responses to likely changes to the overtime exemptions—whatever those changes end up being.