The Department of Labor (DOL) has proposed several changes to the overtime regulations of the Fair Labor Standards Act (FLSA) that are expected to take effect in the middle part of 2016. The changes will raise the minimum salary requirements for exempt employees and introduce a mechanism that makes automatic annual increases to the salary requirements to reflect economic conditions. This post will offer a quick guide to DOL’s proposed changes to FLSA overtime regulations and a brief overview of the implications for businesses.

Under the current standards, employees who fit the duties and minimum compensation tests of white collar workers or highly compensated employees (HCE) are exempt from FLSA overtime pay requirements. The minimum compensation thresholds were set in 2004 and never updated, prompting this executivebranch effort to enact changes. The white collar exemption covers employees who perform primarily executive, administrative, or professional duties as defined under the DOL regulations and earn more than $455 each week ($23,6000 annually) on a salaried basis, with a few specific exceptions. The HCE exemption covers employees who regularly perform one or more duties of an exempt administrator, executive, or professional, perform primarily non-manual labor and earn at least $100,000 per year in guaranteed compensation.

The proposed changes would increase the minimum compensation amounts from current levels to the 90th percentile of earnings for all full-time salaried workers to meet the HCE exemption and to the 40th percentile to meet the white collar exemption. Based on DOL’s historical and projected figures, that would translate to new minimums of $122,148 and $50,440 per year, respectively. Each annual increase would be pegged to either the Consumer Price Index for All Urban Consumers (CPI-U) or keep the minimum salary pegged to the 40th percentile of all full-time salaried employees.

There are several steps employers can take now to help plan for and adjust to the looming changes. First,inventory the number of currently exempt white collar employees who earn less than $50,440 and those who earn just slightly less than that amount. The same inventory should be taken of currently exempt HCE employees who earn less than and just slightly less than $122,148. Second, each listed employee’s typical weekly hours should be considered and decision modeling applied to determine the optimal path forward, whether that means a salary raise to retain exempt status, adjusting base pay rate to mitigate the effect of anticipated overtime wages, or hiring additional workers to reduce overage hours.

If any information gaps exist about an affected employee’s typical weekly hours, now is the time to start tracking actual hours worked. If you expect to make reductions to base pay rates, consider creating internal marketing messages to address anticipated employee confusion and resistance. Above all, even though the proposed changes may increase labor costs, it is important to avoid knee-jerk reactions like reclassifying affect employees as independent contractors. Such decisions, if not legally defensible, can cause drastic consequences to the business.

For a consultation regarding your individual business issues, please contact San Diego Corporate Law today!