The U.S. Department of Labor's Wage and Hour Division recently disclosed the details of its final revised regulations relating to certain "white collar" salary exemptions under the federal Fair Labor Standards Act.

What changed?

In brief, the following changes will be made in USDOL's definitions of executive, administrative, professional exemptions under the FLSA:

  • The minimum salary threshold is increasing to $913 per week, which annualizes to $47,476 (up from $455 per week, or $23,660 per year).
  • This amount will now be "updated" every three years (meaning that it will likely increase with each update), beginning Jan. 1, 2020. USDOL will announce these changes 150 days in advance.
  • Employers will be able to satisfy up to 10 percent of this new threshold through nondiscretionary bonuses and other incentive payments, including commissions, provided that the payments are made at least quarterly. (This crediting will not be permitted as to the salaries paid to employees treated as exempt "highly compensated" ones.)

These new rules become effective Dec. 1, 2016. Unless these changes are postponed, by that time you must have done what is necessary to continue to rely upon one or more of these exemptions (or another exemption) as to each affected employee, or you must forgo exempt status as to any employee who no longer satisfies all of the requirements.

Notably, the USDOL did not change any of the exemptions' requirements as they relate to the kinds or amounts of work necessary to sustain exempt status (commonly known as the "duties test").

What should you do?

First, even though some in Congress are still considering action aimed at stopping these changes, you should assume for the time being that the new requirements will take effect as scheduled (Dec. 1, 2016).

Second, you should analyze which of your employees may be affected by these changes.

Third, you should develop FLSA-compliant pay plans for those employees affected by these changes. Perhaps there is another exemption that may apply to them. If not, you have several options for addressing these changes, including:

Pay increase

Raise the affected employees' salaries to $913 per week or more so they meet the new salary test. This option could well be the most expensive and may be cost prohibitive. Of course, this pay change assumes the affected employees still meet the duties test for the applicable exemptions.

Change to hourly

Convert the employees' pay to hourly and pay them one and one half their regular rate of pay for all hours worked in excess of 40 in any given work week. If you elect to pursue this option, you will need to monitor and limit the employees' overtime hours worked to prevent the overage from becoming a budget buster.

Several methods are available for this option, including among others, simply dividing the salary by 40 and deriving an hourly rate or dividing the salary by the average number of hours worked each week (suppose 50). So, depending on how you convert the employee's pay, an employee could have his $750 per week salary reduced to either $18.75 per hour (if the salary is divided by 40) or to $15 per hour (if the salary is divided by 50). Overtime hours would be paid at $28.125 per hour or $22.50 per hour, respectively.

These are just two examples, and you may use other conversion formulas, so long as the nonexempt employee receives at least the correct minimum wage and overtime for hours worked. Additionally, the actual "regular rate of pay" for the employee must also take into account other sources of pay, such as incentives, nondiscretionary bonuses or other extra pay.

Fluctuating pay

Convert the employees to some variation of the Fluctuating Rate Pay Plan. While this pay plan has been approved and is addressed in existing USDOL Regulations, the USDOL does not favor this plan, and some states do not allow it. Strict compliance with the regulations is required, and the salary must clearly cover all hours worked in any particular week, regardless of the number.

Leaving aside USDOL efforts to discourage the use of such plans, employers are sometimes concerned about the employee-relations effects arising from the fluctuating regular rate and from the half-time overtime premium. These characteristics of a proper fluctuating-workweek plan are entirely lawful under the FLSA, but variations on the plan might help strike a better balance between labor costs and employees' reactions.

Fourth, you need to make sure you have an accurate record of all hours worked by nonexempt employees — regardless of whether they are paid hourly or a salary under some variation of the fluctuating pay plan. You do have some flexibility in how you keep time records since the FLSA does not prescribe a particular method of timekeeping. What matters is that the record be and appear accurate and that it accounts for all hours worked.

Fifth, if you have any other employees whose exempt status may be in the "gray area" because of their duties, now is a good time to change the pay plan and/or duties of these employees to get them into compliance — either by converting them to a lawful pay plan for nonexempt employees or by changing their duties so their exempt status is more defensible.

Sixth, stay abreast of new developments in this area. For example, you should monitor the pending lawsuits challenging these specific changes. You should also monitor the USDOL to see if more new regulations are proposed, and state and local governments to see if they issue any new wage and hour laws.

Lastly, if you have any questions about these changes or need practical advice in complying with them, you should consult a professional who is well versed in this area.