Mandatory Wage Exemption Changes

Originally published by Cleve Clinton.

Gunner Gunter employs dealership manager Sayles and computer technician H. Packard (“Pack”) at Falconaire’s Fine Ford and pays these “white collar” employees $40,000 per year. In busy sales months, each averages 50-60 hours a week without paid overtime. Do the new FLSA regulations affect Gunner?

Yes. Effective December 1^st, Sayles and Pack must either be paid for their overtime hours or to avoid this mandate, their minimum annual salary must be $47,892 (up from the current $23,600 minimum per year) assuming they are Fair Labor Standards Act “white collar” employees (i.e., executive, administrative or professional) under the exemption, and not otherwise entitled to overtime pay.

The Labor Department estimates the new rules affect some 5 million exempt workers, predominantly in Texas, California, Florida, Illinois, New York and Pennsylvania, which have the largest number of newly eligible workers – 200,000 or more in each state. Of those numbers, hardest hit are lower-wage businesses and service industries like hospitality and retail, which identify the new rules as “Career Killers.” Rather than increasing salaries, many business may elect to reclassify professionals as hourly workers and reduce hours, adjust or remove existing benefits and flexibility (including loss of their more prestigious titles) or cut base salaries. “Comp time” (working overtime for future days off) is not an option for these newly eligible overtime workers. Even with labor reductions, the projected additional administrative costs to businesses to track hours of more employees and updating payroll systems are estimated to cost $745 million.

Employers who fail to comply after December 1^st risk Department of Labor (DOL) investigation. More daunting, perhaps, is the threat of private litigation, including class action litigation – a risk with substantial downside potential.

Tilting the Scales in your Favor

Evaluate your current employees and salary levels to assess your company’s possible DOL exposure. If you elect to reclassify employees from “overtime exempt” to “overtime eligible”, develop comprehensive plans to (1) determine new hourly rates for impacted employees; (2) revise or update current timekeeping programs and policies to reflect the changes; and (3) implement training for both managers and employees addressing the changes. Congress may attempt to redirect these changes with legislation, but it’s more likely that the results of the November election  will dictate whether that momentum is sustained. Consider using a Checklist.

For more insight on cutting edge employment issues, including federal changes to overtime exemptions, visit the Texas Employer Handbook blog, written by Gray Reed employment partner Michael Kelsheimer.

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