Huge increase in exempt salary level minimum proposed by Department of Labor
UPDATE: Salary level minimum now finalized. Read more….
The Department of Labor (DOL) recently issued a proposed rule to increase the minimum salary requirements under the Fair Labor Standards Act (FLSA) for salaried exempt employees. This would require that ALL exempt employees be paid no less than $50,440 annually starting in 2016—almost doubling the current minimum of $23,660.
The proposed rule would also increase the minimum salary for Highly Compensated employees to 90% of the national earnings of full-time salaried workers ($122,148 annually in 2016). These numbers will go up annually in the future by a percentage. So, this is not a one-time change; these minimum salary thresholds will continue to increase each year.
“The President specifically mandated that the DOL raise the minimum salary level, but few anticipated that the number would be this high,” says Leslie Day, Precision Payroll’s Director of HR Consulting. She notes that this new exempt salary threshold was created by marking a ‘line in the sand’ at 40% of the average national earnings level for full-time exempt employees. The DOL has stated that this new salary level is an intentional attempt to force 40% of the exempt workforce toward a classification change to non-exempt status, where the employees must be paid for overtime.
“This will create an unprecedented level of change in the business community,” Day says, noting that the change will impact 4.6 million salaried exempt employees. “It is critical that business owners and top management try to get a grasp NOW on how it will conceivably affect their business.”
The rule is currently posted in the Federal Register, where comments can be logged for 60 days, ending in early September. Then, following a review period, experts foresee the rule being finalized, and that any adjustments to the proposed threshold would be small. The DOL has also asked for comments on additional possible changes to related areas of the FLSA, implying that more changes may be included in the final outcome.
For application of this new rule, a salaried exempt position is one that meets all of the following criteria:
- the company has designated the position as exempt
- the work is executive, professional or administrative in nature
- the position meets the duties test criteria established by the FLSA
- the employee is paid on a salary basis: the same paycheck every week independent of how many hours are worked.
These employees are generally seen to have work responsibility related to the overall function of the organization.
Non-exempt salaried employees and hourly employees are paid based on the number of hours they work, and must be paid overtime (time-and-a-half) for hours worked over 40 hours per week under the Federal law, or any other overtime level as mandated by state or municipal law or union contract.
Legal experts say the finalization of the rule will likely come sometime between November and March, with the effective implementation date being summer of 2016.
Day warns that it is critical that employers are aware of how this rule would impact their workforce, what changes they might need to make, and the financial implications—especially for non-profit organizations and small- to medium-sized businesses in industries with small profit margins.
“Pay adjustments will most likely be required in an extremely short timeframe,” says Day. “This is not a time to wait until the last minute to understand and strategize.”
The government and some business experts have said that the new rule could lead to process efficiencies and other long-term benefits to companies. “When there are sudden pressures in as critical an area as employee pay, companies become creative,” says Day. “Companies will likely be forced to re-examine how tasks are done, who will perform these tasks, and how to streamline tasks to avoid overtime.”
Day recommends that all salaried exempt positions in the organization be reviewed to make sure they meet all the criteria mentioned above for being exempt under the Fair Labor Standards Act. A more thorough explanation of these criteria can be found at http://www.dol.gov/whd/flsa/.
Day also points out that this rule is far from finalized; we will keep you informed as the rule changes are decided.
Precision Payroll offers an HR Help Desk service that can help employers wade through questions, issues and options as they transition to this new administrative rule. In addition, Precision HR can perform an audit of a company’s exempt positions to determine if they meet the criteria for being exempt. For more information, contact Leslie Day at email@example.com or 630-785-2205, or Bonnie Kohlmeier at firstname.lastname@example.org or 630-812-2392.
Precision Payroll also offers desktop-based timekeeping and tracking software that allows both exempt and non-exempt employees to track the hours they work. For more information, contact Gary Young, email@example.com or 630-242-1522.