Proposal would double salary threshold for exempt employees

Employment attorneys and their clients large and small are scrambling to find ways to deal with a likely change in federal regulation that could more than double the earnings threshold for workers classified as exempt from overtime.

Halbert Halbert

“It’s creating a lot of discussion. There’s a lot of buzz about it,” Bose McKinney & Evans LLP attorney Jeff Halbert said of the proposed Department of Labor regulation drafted at the behest of President Barack Obama. The proposal, announced in Obama’s State of the Union address in January, would raise the current threshold for overtime-exempt workers from a weekly salary of $455 to a proposed level of about $970.

The White House noted the threshold hasn’t been raised in more than 10 years and said the changes would entitle about 5 million additional workers to overtime pay. The administration says many exempt employees end up toiling 50 to 60 hours a week in some professions. Raising the threshold, Obama says, would build on efforts to sustain and grow the middle class.

Employers, though, worry the regulations will have unintended consequences.

Focus overtime numbers“You’re going to see potentially a significant number of employers cap hours,” Halbert said. He and other employment attorneys said employers are worried the proposed regulations could lead to higher costs, layoffs and long-term workforce uncertainty.

Workers who receive a weekly salary currently may be exempt from earning time-and-a-half for working more than 40 hours a week if their salary is greater than $455 a week. But workers also must meet certain tests to be overtime-exempt. Broadly, their jobs must include duties categorized as executive, professional or administrative in nature or involve outside sales. Some qualifiers include employment duties such as supervising more than two employees or exercising certain judgment or independent discretion.

Halbert said that for the first time, the Labor Department also proposes to tie the exemption threshold to federal data that would set threshold income at the 40th percentile of weekly earnings nationwide. The threshold would be adjusted periodically, perhaps annually.

Department of Labor statistics show professional and technical services jobs are likeliest to have exempt employees, with 16.8 percent of those workers so classified, followed by finance (9 percent), retail (7.5 percent) and health care (5.5 percent).

“From our firm’s perspective, we think it’s a good thing the Obama administration is doing,” said Bradley Wilson, an attorney at Haskin & Associates in Indianapolis that represents plaintiffs in employment disputes. He said the current threshold of $455 a week “puts individuals working in salary positions below the poverty level.”

Wilson said complaints about workers being wrongly categorized as exempt from overtime are common. “It’s a more frequent thing than we even see as plaintiffs’ attorneys. … A lot of workers are too scared to do anything.”

About 140,000 comments on the proposed regulation have been received at The comment period opened in early July and continues through Sept. 4.

Kemp Kemp

Laurie Goetz Kemp, a Kightlinger & Gray employment attorney in New Albany, said she’s been occupied recently speaking with groups of clients anxious about the proposal. “I think it’s going to be a big hit for businesses, smaller businesses more so than larger,” Kemp said.

Exempt workers often have some administrative duties, but frequently are working managers who also toil alongside the workers they oversee, particularly in smaller enterprises. “Most end up working more than 40 hours. They work to get the job done.”

Kemp expects a final regulation may change the duties required to classify employees as exempt. She said the rules at one time required exempt salaried workers to perform at least 50 percent of their duties in administrative or other qualifying capacities. She believes that provision could return in some form.

Hollis Hollis

“This may end up being a jobs-killing regulation,” said Faegre Baker Daniels LLP attorney Edward E. “Ted” Hollis. Nonprofit employers may be particularly hard hit, he said.

Hollis said employers have a few options short of layoffs in dealing with the proposed regulation:

? If a worker’s earnings are close to the proposed threshold, the employer may raise her salary above that level to preserve the exemption;

? If not, an employer may convert the employee to hourly, track hours and pay overtime for hours worked beyond 40 per week; or,

? Reclassify the worker to salaried non-exempt status. This is a little-used classification in which employees are paid a salary for 40 hours whether or not they work that many. Compensation beyond 40 hours is paid at half the regular hourly rate.

The latter classification is infrequently used because it’s primarily designed for workers with unpredictable or fluctuating work weeks. It also can be bad for morale in some situations, Hollis said.

Hollis predicts the regulation is likely to be adopted, and he also foresees problems for employers that haven’t thought through the proposed changes.

Kathleen Anderson, a partner at Barnes & Thornburg LLP’s Fort Wayne office, said she doesn’t think the regulation will end up costing jobs. Rather, employers are likelier to reclassify workers and change compensation structures. For workers who are well below the proposed threshold, their pay may be converted to hourly compensation at a rate that factors in the overtime they typically work so that their overall compensation doesn’t increase.

This could have an effect on employees’ attitudes, though. “There’s a little bit of a status that relates to being salaried,” Anderson said. “People are happy about the fact they don’t have to punch a time clock. If they have to now, I don’t think that will go over well.”

Anderson has been talking with groups of employers who, among other things, are nervous about what to do about exempt employees whose pay ranges vary with their experience. She said someone in a group she spoke to recently said the regulation would affect other things, such as severance pay and other benefits that may be available to salaried but not hourly employees.

“Companies are going to have to think through all the things that are affected,” she said.

Employers accused of violating provisions of the Fair Labor Standards Act may be liable for unpaid earnings and liquidated damages equal to those wages, plus a victorious plaintiff’s legal fees and costs.

“In the last decade or so, wage and hour claims are something that’s been growing every year in the employment arena,” Hollis said. “If the regulation is adopted, it’s going to foster a lot more wage and hour litigation.”

Wilson said he thinks the risk of increased litigation isn’t substantial because employers have been on notice of the proposed change. Employers, though, could face risks aside from litigation if they attempt to reclassify workers to skirt the new regs. “The reverse side is, employees simply leave and go find other employment,” he said. “Then you have a brain drain.”

Kemp said clients she’s advising are dealing with the uncertainty of what the new regulation will look like, but there are decisions that can be made now. For instance, employers can be proactive by auditing employee populations and determining whether they can absorb the cost of increasing exempt employees’ salaries to the new threshold level.

Barring possible court challenges, attorneys say they believe it’s likely a final regulation will be adopted sometime in 2016.•

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