New FLSA Changes 2019 – – What You Need to Know

Back in March 2019, we shared with you that some proposed
changes to the Fair Labor Standards Act (FLSA) were on their way. Well, it’s
official . . . they’ve arrived and it’s time for us to digest the changes and
get an implementation plan in place.

To help us understand what’s going on with the FLSA, I
reached out to our friends at Foley & Lardner, LLP. They’ve helped us
answer questions before, including this one about eliminating
employee benefits. I’m delighted that Alexander R. P.
Dunn is an associate and litigation lawyer in Foley’s Milwaukee office has
offered to assist. Alex is a member of the firm’s labor and employment
practice.

Please remember that Alex has a regular full-time job as a
lawyer and he’s doing this to give back to the profession. His comments should
not be construed as legal advice or as pertaining to any specific factual
situations. If you have detailed questions, you should address them directly
with your friendly neighborhood labor and employment attorney.

Alex, before we get to the FLSA announcement itself,
let’s talk about what this new rule is focused on. (i.e. What’s the salary
threshold)?

[Dunn] The salary threshold is a bit like a minimum wage for
salaried employees. Under the Fair Labor Standards Act (FLSA), employees are
essentially classified into two groups and there are different legal
requirements for each type of employee:

Employees who earn hourly wages have to be paid
a minimum hourly wage, and they are entitled to overtime pay for each
additional hour worked over 40 hours per week.Professional, executive, and administrative employees
who earn a salary and also satisfy a ‘duties test’ are known as ‘exempt’
employees because the overtime provisions of the FLSA do not apply to them.

For exempt employees, each employee must receive a certain
minimum guaranteed salary every week. This minimum salary threshold is the
subject of the new U.S. Department of Labor (DOL) rule, which increases the
threshold from its current level at $455 per week ($23,660 annually) to $684
per week ($35,568 annually) beginning on January 1, 2020.

Back in 2016, the U.S. Department of Labor was planning
to make some BIG changes to the FLSA, including increasing the salary threshold
applicable for exemptions. Did that law ever go into effect?

[Dunn] No, that rule did not go into effect.

In 2015, the Obama-era DOL proposed a rule to increase the
minimum salary threshold. After proceeding through the standard
notice-and-comment rulemaking process, the DOL’s final rule, at the time
scheduled to go into effect on December 1, 2016, would have more than doubled
the minimum salary threshold to $913 per week ($47,476 annually).

In November 2016, after twenty-one states and dozens of
business organizations challenged the rule in court, a federal judge in Texas
issued a nationwide injunction that prevented the rule from going into effect. A
DOL appeal of that ruling was held in abeyance (put on hold, essentially) while
the new Trump-era DOL weighed its options. Ultimately, the DOL decided to
propose a new rule earlier this year that rescinds the Obama-era rule and
implements a more modest increase in the salary threshold. That rule is now the
final rule.

Okay, NOW tell us the new proposed FLSA rule and when it goes into effect.

[Dunn] For most people, the most immediate and most
significant change is the increase to the minimum salary threshold for exempt
employees.

The CURRENT minimum salary threshold is $455 per
week ($23,660 annually). The DOL’s NEW rule raises the minimum salary
threshold to $684 per week ($35,568 annually). Any exempt employee who
currently earns a weekly salary that is less than $684 per week will be
impacted by this new rule.

However, the rule makes a number of other important
changes. In addition to raising the minimum salary threshold, the new rule
allows employers to use nondiscretionary bonuses and/or incentive payments to
make up part of an employee’s salary—up to 10%. In practice, this means that an
employer who pays a 5% bonus every year to an employee can count that 5% toward
the minimum salary threshold. But, if the employee does not earn the bonus, the
employer will have to either make up the difference between the minimum
required amount or be forced to pay overtime. In other words, what an employer
can do is hold back up to 10% of the employee’s weekly pay and pay it as a
bonus at the end of the year but cannot impose requirements that might
jeopardize the bonus if the employer is using it to ensure the salaried
threshold is met.

The new rule will also increase various other salary
thresholds. The threshold for so-called ‘highly compensated employees’ will
increase to $107,432 annually, while the special salary threshold in U.S.
territories will increase to $455 per week (except American Samoa, where the
special salary will remain at $380 per week).

These changes all take effect on January 1, 2020.

Speaking of the 2020 effective date, what should
organizations do to get prepared?

[Dunn] The first step for any organization is to look at
whether any of their employees are paid below the new salary thresholds but are
classified as exempt. If all of your employees paid below the new salary
thresholds are paid hourly, then this new rule isn’t likely to affect you.

If all of your employees are paid a salary and that salary is greater than $684 per
week ($35,568 annually), you also probably won’t be affected by this rule. However,
organizations with employees who receive a salary in excess of the current
minimum, but less than the minimum come January 2020, will need to take
additional steps.

Once an organization determines that it will need to make
compensation changes to comply with the new rule, organizations will have to
consider how to make those changes.

Option 1: Increase employee salaries across the board to comply with the new minimum.Option 2: Keep employee pay below the salary minimum and switch to compensating employees hourly.Option 3: Do a little of both: increase some employee salaries to comply with the minimum and keep some employee compensation level while switching them to hourly.

Aside from just the dollars and cents of compensation
decisions like this, organizations should be thoughtful about how these
decisions will impact morale and organizational culture. Not having to
track hours worked can be a status symbol and a point of pride, so losing that
status may have negative consequences for the worker and the organization. Likewise,
seeing that certain employees are having their salaries increased while others
are not, and instead are switching to hourly wages, may send a message about organizational
culture and priorities. Remember, too, that this transition will likely occur
during or shortly after the holiday season.

Employers must also be cautioned: simply paying an
employee the minimum weekly salary does not make them exempt. Employees must
perform certain duties to be properly classified as exempt.

I’m sure some readers are thinking it, so I’m going to ask. Is there any chance that the current administration might change their mind and not go through with this FLSA change? And if so, what can organizations do to avoid wasting resources preparing (and then finding out it was all for nothing)?

[Dunn] The last time that the DOL increased the minimum
salary threshold was in 2004 and this rule change has been a priority for the
DOL for years now. In fact, the DOL’s final rule notes in several places that
it is the Department’s intent to update the minimum salary threshold more often
in the future to avoid another long period of inactivity. Some groups have already
stated that they may file a legal challenge to this new rule, so employers should
continue to pay attention over the coming months. Nevertheless, the law is set
to change on January 1, 2020, and employers need to be prepared.

However,
for the professional cynics, preparation for this change in the law can still be
a positive. If the DOL’s stated intent to update the salary threshold more
often in the future proves true, we may see increases to the minimum salary
threshold more frequently going forward. Organizations that use this increase
as an opportunity to streamline their review process and establish best
practices will be ahead of the curve when it comes time to adapt to a new
minimum salary threshold three, four, or five years from now.

Aside
from building capacity to respond to future threshold increases, it is just good
organizational hygiene to review employee designations from time to time to
make sure that your designations are appropriate under the law and consistent
with your organizational goals and culture. This is a great opportunity for
organizations to take a step back and consider whether there are different
choices they want to make in this space.

Last question and this kinda plays of the previous one. As a human resources professional, how do I convince the naysayers on my senior management team who are going to say, “We’re tired of the FLSA flip flops. We’ll deal with the law when we know it’s gonna happen … in January 2020 … after it really happens.”

[Dunn] ‘We didn’t think it was actually going to happen.’ isn’t a legal defense. At the risk of
stating the obvious, the whole reason the DOL set up this rule to go into
effect on January 1, 2020, is so that organizations have time to understand the
rule, understand how it applies to them, and take steps to comply with the
rule.

Waiting until the rule actually goes into effect not only
puts your organization at risk of a lawsuit, it also squanders a perfectly good
opportunity to determine the best method of compliance with the rule at a pace
that suits your organization (as long as your pace is before January 1) and put
the appropriate communication into place.

Put simply, there is no grace period to come into
compliance after the rule goes into effect. The grace period is now.

My thanks to Alex and the Foley team for helping us
understand what’s happening and offering some food for thought when it comes to
implementing these changes within the organization. If you’re looking to stay
on top of labor and employment law issues (and I know you are), be sure to
follow Foley’s
Labor & Employment Law Perspectives blog – it’s on my must-read list.

I understand that HR compliance might not always be the sexiest part of our jobs. But it’s necessary. Very necessary. Organizations have lots of compliance related matters in every aspect of the business – accounting, environmental, safety, and HR. We’re simply doing our part by keeping the organization in HR compliance.

Image captured by Sharlyn Lauby at the 34th Street Graffiti Wall in Gainesville, FL

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