For nearly 100 years, the Fair Labor Standards Act (FLSA)
has provided legal guidance on the treatment of primarily non-exempt workers with
regard to minimum wage and overtime. But what once seemed to be carved in stone
may be about to change. What does this mean for your company and how will you
The back story seems simple…
In March 2014, President Obama signed
a memorandum to the Department of Labor (DOL) to review and update the
longstanding FLSA regulations. Proposed regulations were released in June 2015,
accepting comments until September of that year. The DOL will finalize and
release final regulations in July 2016 with a 60-day grace period allowing
employers to comply.
Compliance is not an option—it is required if a company has
at least two employees and annual sales of $500,000, to include workers who are
"engaged in commerce or in the production of goods for commerce" as
well as various other industries (e.g., hospitals, schools, government agencies,
etc.). The changes will be enforced by the Wage and Hour Division of the DOL
with investigation and fines for non-compliance.
What isn’t changing?
The duties test
portion of the white collar exemptions of the FLSA does not have significant
changes but exceptions like the California rule were up for comment with the
DOL—This particular rule deals with percentage of time as it applies to the
primary duties test. Some see this example as an indication that other
exceptions may be up for discussion.
The DOL has
stated that it “is not considering expanding the salary level test
calculation to include discretionary bonuses.” at this point in time…but under
review are non-discretionary bonuses as well as incentive payments – as well as
how and can they be applied toward the standard salary test for all three
(executive, administrative and professional) levels of exemptions.
What is changing?
The threshold salary
increase is an increase from $23,660 annually ($455 weekly) to $54,400 annually
($970 weekly). The threshold salary is defined as the minimum salary that must
be paid in order to be exempt from FLSA rules.
Employees can expect that they will receive
either a salary increase to the threshold or their duties may change to impact
their exempt status or qualification for OT hours and pay.
These rules are in effect no matter the location;
this means that locations with less expensive costs of living will have the
same threshold as those areas with a higher cost of living.
This salary threshold will no longer remain
constant year to year but have a rolling adjustment indexed annually. The
duties test will remain the same.
What is the impact?
This change impacts an estimated five
million U.S. workers. Economists have predicted that employers of all sizes
will be examining staffing population distributions to try and offset the cost
The grace period for compliance is 60 days, requiring
companies to have a plan ready to act upon later this year.
The threat of salary compression is real in
many industries, with employee engagement a serious concern for those that are
currently at or directly above the new salary threshold.
Salary changes are not the only concern. A
recent i4cp member discussion on the topic included the issue of perception
between an exempt and non-exempt position— how positions are adjusted may also
change the perceived importance for a role. Will that change the desirability
of some jobs and what message will your company send?
Another point of discussion was the question
of which route to choose: the salary increase or the OT plan? Each get to the
end of the same road, but each route has its own barriers to entry (and
The next steps while
These are just a few of the challenges that companies need
to investigate and devise a plan of action upon in the coming few months. i4cp
will continue to follow developments and the ramifications of these changes and
how they impact business. i4cp members may access a literature review of recent
publications on this topic in the Total Rewards
Knowledge Center on our website.
i4cp’s Total Rewards Board, which will hold its inaugural
meeting later this year, will deal with questions just like these. For more
information contact your Account Manager or Mark Englizian, Board Chair, at
Note: The information and interpretations in this
post are provided for informational purposes only and not intended to be legal
advice. Please consult with your organization's legal counsel for guidance on
FLSA specific to your situation.