The U.S. Department of Labor released its final rule, requiring minimum wage and overtime for some employees who are currently “exempt” from these requirements. Employers need to plan ahead for implementation, as the rule change could lead to seismic shifts in some payrolls.
The federal Fair Labor Standards Act (“FLSA”) requires that employees receive minimum wage and overtime (calculated at one-and-a-half times the regular rate of pay for hours over 40) unless they are “exempt” from one or both requirements. The most popular exemptions are the so-called “white collar exemptions,” which apply to executive, administrative, and professional employees who meet rigorous criteria based on their duties. To be exempt, these employees must be paid a salary of at least $684 per week and the employer must pay on a salary basis (meaning no docking for partial workweeks, subject to limited exceptions). Doctors, lawyers, and teachers can be exempt under the FLSA even if they are not paid on a salary basis and there is no minimum salary for these employees. (The computer professional exemption has special rules under which employees can be paid hourly, but in any event, there is no computer professional exemption under Connecticut state law.)
The rule change substantially increases the salary threshold from $684 per week ($35,568 annually) to $844 per week ($43,888 annually) by July 1, 2024. The rate will increase again on January 1, 2025, to $1,128 per week ($58,656 per year). On July 1, 2027, and every three years thereafter, the rate will increase automatically in accordance with a methodology to be used to set the new salary level. Nondiscretionary bonuses and incentive payments (including commissions) continue to be allowed to account for up to 10 percent of the minimum salary level. By contrast, discretionary bonuses do not count toward the minimum salary level. The duties tests are not changing under this rule.
The rule also increases the thresholds for the “highly compensated employee” exemption from $107,432 to $132,964 by July 1, 2024, and to $151,164 by January 1, 2025. However, Connecticut does not recognize the highly compensated employee exemption, so employers should not rely upon it for employees in the state.
Raising the salary threshold is expected to transform millions of exempt employees into non-exempt employees overnight. Some employers will be able to weather this change better than others. Virtually every employer in the country is subject to the FLSA, even if there is only one employee. This includes non-profits and public sector employers. In Connecticut, where the cost of living is high, the effect of this change may be lower than elsewhere in the country. It is more likely here than elsewhere that employees who meet the duties tests are already earning at least $1,128 per week. However, non-profit, low-profit, and government employers may find that many of their employees are subject to this rule change and these employers may have more rigid budgets that cannot withstand the impact. Employers with an annual volume of sales or business of less than $500,000 may wish to consult an employment lawyer to see if they are one of the very few employers not subject to the FLSA.
To comply with the rule, employers need to either raise salaries of affected employees to ensure they meet the threshold or begin treating these employees as non-exempt. Raising salaries is straightforward, but remember that the rule is likely to require inflationary increases, so the amount will change going forward. If employers do not wish to raise salaries, the employees must be treated as non-exempt. This means that employers must keep records of their hours worked and they must be paid overtime for hours over 40. It is legally permissible to cap hours at 40 by prohibiting employees from working overtime and some employers may choose to hire multiple employees to do what was once one employee’s job. Collective bargaining agreements may limit employers’ options.
Employers should take time now to review their payroll practices to ensure they are in compliance with state and federal laws now and in the future. For each employee believed to be exempt, ensure that he or she meets the duties tests for the applicable exemption, is paid on a salary if required by the exemption, and is paid a salary that is high enough to support the exemption. In considering the duties of a position, employers should be concerned not with titles or job descriptions, but with how the employee actually spends his or her time. It is a good idea to update job descriptions to match reality.
Ensure that all non-exempt employees’ hours are being tracked, including time spent offsite performing work, on call, or traveling, to the extent required by law. Ensure that break periods of fewer than 20 minutes are treated as working time.
Now is a good time to change payroll practices without raising alarm that perhaps things were not done properly before. Employers can connect changes with the new overtime rule to minimize suspicion, particularly in cases of misclassification. Internal review of payroll practices should be aided by a competent labor and employment attorney, as the rules can be excruciatingly detailed. Changes to payroll practices, hours, or other terms or conditions of employment should be communicated to employees well in advance, ideally at least 30 days.
Of course, the final rule is likely to face legal challenges that could delay implementation. But with the July 1st deadline fast approaching, employers must begin to plan now for these significant changes.
Our team of labor and employment attorneys can assist employers in adjusting to the new white-collar exemption requirements and ensuring compliance with all applicable labor and employment laws.