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Thursday, March 24, 2016

Budgeting with a Blindfold: Preparing for FLSA Changes

The following is an important summary of new FLSA standards for "exempt" employees that was recently published on Ancel Glink's labor and employment blog, The WorkplaceReport:

As we have previously advised you, the U.S. Department of Labor (“the DOL”) has published proposed rules that are expected to increase the minimum salary necessary to qualify for one of the “white collar” exemptions from the overtime requirements of the Fair Labor Standards Act (“FLSA”).  Under current rules, established in 2004, an employee must be paid at least $455 per week ($23,660 per week) in order to qualify for exempt status.  The DOL is now proposing to increase the minimum salary for exempt status to $970 per week, or $50,440 per year for 2016, with a cost-of-living escalator for years after 2016.

The new rules are expected to go into effect sometime this summer – perhaps as early as June.  Whether they will be effective immediately or whether employers will be given time to comply is not yet known.  Almost certainly, however, they will be effective before President Obama leaves office in January of 2017.

Many public employers have exempt-level positions paying less than $50,440 per year.  For those positions, the employer either will have to increase salaries or reclassify the positions as non-exempt and pay overtime to the incumbents for hours worked in excess of 40 per week.  But just phrasing the choice does not deal with many auxiliary problems, such as:
  1. If the employer has positions (such as recreation program directors) that work irregular hours, especially in the summertime, paying these positions on an hourly basis could result in substantial overtime costs;
  2. If the employer decides to retain exempt status for positions that are paid less than the required minimum salary, the employer must address the  residual effects of raising salaries (perhaps even substantially) for some employees but possibly not for others, even those in the same classification or in higher-level classifications in the same job sequence;
  3. Perhaps most significantly, how does the employer budget for the changes when it doesn’t know when they will go into effect?

This last problem is a serious problem for local government entities that have May 1 fiscal years.  Most such entities are in the process of formulating or even finalizing their May 1, 2016 – April 30, 2017 budgets now.  Almost certainly, the new regulations will impact these employers during the 2017 fiscal year.  But when and to what extent will that impact occur?

For employers that have not already done so, it is strongly suggested that “mini-audits” be conducted with respect to the classifications potentially affected, both directly and residually, by the new regulations.  Positions that are clearly non-exempt (such as laborers and clerks) can be eliminated from the analysis.  Likewise, positions that are clearly exempt (such as the Executive Director of a Park District or the Village Manager of a municipality) and that are not likely to be affected residually by salary increases for lower-level exempt employees do not require more than cursory analysis.  But other classifications, currently considered to be exempt, should be reviewed to determine:  (a) whether they are properly considered to be exempt under the FLSA’s “duties” test for exempt status; (b) whether, if they are exempt under the duties test, it is in the employer’s best interests to continue to claim exempt status for them or whether the employer would be better off reclassifying the employees as non-exempt; (c) whether, if exempt status is to be continued, salary adjustments are needed, not only for directly affected employees but also for other employees who are affected, surely but indirectly, by the salary compression inevitably resulting from increasing the salaries of directly affected employees at least to the required minimum salary level; and (d) how the employer should address budgeting concerns resulting from federally-mandated mid-term personnel cost increases.

Original Post Authored by Don Anderson, Ancel Glink


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