Ranks of those eligible for minimum wage and time-and-a-half for overtime could swell with anticipated change in Department of Labor definition of “exempt employee”

Dept of Labor logo-1If you’re an employer or an employee, you’ll want to read this. The Department of Labor is in the process of reviewing its definition of “exempt employee” for purposes of the Fair Labor Standards Act (FLSA). Since this affects whether or not some or all employees are entitled to minimum wage and overtime, you’ll probably be interested, especially when you hear that the DoL’s proposals, if adopted, could substantially increase the number of employees subject to those entitlements.

The DoL proposed the changes in question in a Proposed Rule and Request for Comments issued on July 6, 2015. We didn’t report on the proposals back then because we’re primarily communications lawyers, not employment lawyers. But we’ve received enough inquiries about this from clients and at conferences hosted by various state broadcast associations and others since last July that we decided it’s probably a good idea to give our readers a heads-up about the changes that are in the works (although, as indicated below, they’re not likely to take effect for at least several months, and maybe longer – but it’s always good to be ahead of the curve).

Which employers, exactly, are involved here? First, under the concept of “Enterprise Coverage”, the FLSA applies to all employees of any company that (a) has more than $500,000 in annual revenues and (b) is engaged in interstate commerce. The DoL interprets “interstate commerce” very broadly to include not only those who physically travel state-to-state, but also those who, for example, load or unload products going from state to state or those who are part of the interstate infrastructure – which is basically anyone working for an FCC-licensed broadcast station. Thus, any of you who are FCC licensees and have more than $500,000 in annual revenues are, thanks to Enterprise Coverage, subject to the FLSA company-wide. Beyond broadcasting, this could be a newspaper reporter who travels or even just makes calls across state lines in newsgathering.

But even some employees of companies that don’t meet the $500,000 annual revenue criterion may be subject to the FLSA under the “Individual Coverage” test, which applies with respect to any employee engaged in interstate commerce in a given week, whether or not the employing company reaches the $500,000 mark. Since, again, broadcasting is generally viewed as an interstate commerce activity, pretty much every employee at a station is likely to be viewed as routinely engaged in interstate commerce, so each would be individually covered by the FLSA on a week-to-week basis even if the licensee fetches less than $500K in annual revenues.

And what, exactly, is involved here? Unless an FLSA-covered employee happens to fall within a specific exemption, he or she is subject to minimum wage and overtime provisions. Under those provisions, anyone working more than 40 hours in a week is entitled to overtime pay at not less than 1.5 times his/her regular pay rate. (Note that the particular shift an employee works – e.g., nights or weekends or holidays – does not factor into this; the question is simply whether the employee in question exceeds 40 hours in the relevant workweek.)

And which employees, exactly, are involved here? For the past 12 years, at least, an employee’s status as exempt or non-exempt under the FLSA has been determined by a test consisting of three elements: duties, salary basis and salary level. Under the test, an employee is “exempt” from minimum wage/overtime if he/she is:

  • primarily performing executive, administrative, or professional duties as provided in the DoL’s regulations. This is the duties component.
  • salaried in some way, meaning that he/she is paid a predetermined and fixed salary not subject to reduction because of variations in the quality or quantity of work performed. This is the salary basis component; and
  • paid more than a specified salary threshold, currently $455 per week or $23,660 annually. This is the salary level component.

(There’s also a separate higher threshold for exemption that applies when the employee: (1) is paid total annual compensation of at least $100,000 per year; (2) receives at least $455 per week paid on a salary or fee basis; (3) performs office or non-manual work, and (4) customarily and regularly performs at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.)

The proposed changes would affect the salary level component by increasing, considerably, the threshold weekly and annual limits necessary to trigger the exemption. And that is likely to alter the status of an equally considerable number of employees; there will be fewer exempt employees and, therefore, more employees now eligible for overtime pay.

As matters now stand, it looks like the DoL plans to increase the minimum threshold salary triggers for the exemption to $970 per week, or $50,440 annually, starting as early as later this year. The proposal also provides for annual increases in the triggers thereafter. (Part of the reason for such a significant increase is that the minimum thresholds have not been changed since 2004.)

Because many employees of broadcast stations and newspapers tend to meet the salary basis and duties criteria and are paid a fixed salary above $455 per week or $23,600 per year, those employees are not currently eligible for overtime pay, no matter how much they work in a given pay period. But under the DoL’s proposals, we can expect many of the currently exempt employees suddenly to lose that exemption – i.e., anybody who now makes (a) more than $455 weekly or $23,600 annually but (b) less than $970 weekly or $50,440 annually. We’re guessing that a lot of broadcast and newspaper employees fall in that category.

Not surprisingly, the proposal has proven controversial, and not just for employers who fear having to pay a large swath of employees overtime pay.

Employers, of course, should be concerned. If they want to maintain the salary-but-not-overtime status of currently exempt employees, they may now be faced with the possibly difficult choice of: (a) increasing the salaries of those currently-exempt employees or (b) somehow reclassifying them/minimizing their hours. Other steps would also be useful to ensure compliance with the FLSA. For instance, before deciding how to deal with the new limits, employers would probably want to undertake an audit of all employees and positions to identify those who would have to be reclassified. This would require looking at each employee’s actual job descriptions to make sure those descriptions match up with the actual duties of each job. (Tip: Employers should probably do this periodically no matter what. To assist, we’re providing more details about the “duties test” below. ) Employers would be well-advised to hire an attorney specialized in employment law to help them through this.

Once newly non-exempt employees have been identified, they will have to be retrained on things like timekeeping procedures, complying with meal and break policies, and company restrictions on working outside normal work hours and other compensable time issues. Their access to computers, work databases and even smartphones may have to be restricted in order to maintain compliance with overtime rules. (Fun question: what do you do when an employee has a work email account on a personal smartphone?) And don’t forget about the PR side of things: an employee could feel like this is a demotion; to avoid this, clear explanation to all employees about the changes in the law and the effect of those changes on their status should be provided well ahead of those changes.

But employers will likely not be the only ones concerned. Even employees may not be happy. Some may miss the flexibility that comes with being an exempt employee. Employees – especially reporters – may resent being told when to start and stop working, when to take breaks, how long those breaks can last and when they can and cannot take partial days in order to maintain compliance with the FLSA. (Imagine telling a reporter to stop in the middle of a call with a source because he or she has already worked 40 hours that week.) And, as noted, some may view the change of status from exempt to non-exempt to be a demotion.

There is still some hope that this won’t be a complete HR headache. In announcing its proposals last July, the DoL asked for comment on some related issues, including:

  • Whether there should be changes to the duties test. (As noted above, we’re providing a more detailed look at the elements of the duties test below);
  • Whether employers should be able to include non-discretionary bonuses when determining an employee’s salary level, since some employers rely on these bonuses as part of their compensation package and believe it would be unfair to exclude them from the calculation; and
  • Just how the use of devices at home might affect the 40 hour/week calculation.

Since we have not yet seen the full text of the DoL’s final decision in this proceeding, we can’t be sure how these and similar questions may be resolved. We understand that a set of final rule revisions was submitted to the Office of Management and Budget (OMB) in mid-March for its review and approval, after which they will be published in the Federal Register. OMB has at least 90 days within which to approve the final rules (although it could take less time if it moves fast). Once the rules have been published, it’s likely that they won’t take effect for 30 or 60 days after publication. So even if things move really fast – never a given when it comes to the federal bureaucracy – it’s unlikely (although theoretically possible) that the new rules will be in effect before mid-July, 2016. We suspect it’s more likely that they will be taking effect in late summer or early fall, but your guess if probably just as good as our on that score. We will provide updates on that front as warranted.

The bottom line, though, is that it does look reasonably certain that the DoL will be revising its triggers for FLSA exemption in the coming months. Those changes could have a significant impact on many employers. Now would be a good time to look over your employment rolls to see whether you may be among them.

One further cautionary note: Don’t forget that state laws may apply as well. Some states impose thresholds corresponding to the DoL’s, so they may jump when the DoL’s jump. Other states may have separate triggers. This is another reason for consulting with a real live employment law specialist, which we urge you to do as you figure out how all this may affect you (and, if you are, what steps you may want or need to take as a result). As always, check back here for updates.

A quick sidebar/postscript on the duties test. Recall that the FLSA exemption applies to employees who (in addition to satisfying the two salary-related tests) work in jobs that fall into one of three categories: executive, administrative or professional. This aspect of the exemption is not proposed to be changed by the DoL at this time, but to help orient readers in this area, here’s a short summary (trust me, there is a lot of precedent in this area) of how each category is interpreted:

Executive: To be deemed to be in an “executive” position, the employee must:

  • manage the enterprise, or manage a customarily recognized department or subdivision of the enterprise, as a primary aspect of his/her employment;
  • customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • have the authority to hire or fire other employees (or, at least, the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative: To be deemed to be in an “administrative” position, the employee must perform, as a primary aspect of the job, office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. That work must include the exercise of discretion and independent judgment with respect to matters of significance.

Professional: To be deemed to be in a “professional” position, the employee must perform, as a primary aspect of the job, work requiring advanced knowledge, i.e., work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. In this context, “advance knowledge” must be in a field of science or learning and must be customarily acquired by a prolonged course of specialized intellectual instruction.