Last year the Department of Labor (DOL) announced changes to the exempt classifications under the Fair Labor Standards Act (FLSA). These changes will have a profound impact on your staffing model and labor budget.

We checked in with our colleague, employment attorney Sonja McGill of Bell Nunnally, PC. Here are a few insights she had on how employers should prepare. 

Background

 The FLSA was originally enacted in 1938, at the height of the Depression. This federal law establishes the national minimum wage, overtime pay eligibility, recordkeeping, and child labor standards. The Department of Labor (DOL) administers the FLSA.

As we’ll see, the FLSA acts as a “floor” for minimum requirements in these areas. Many states and municipalities have minimum wage, overtime pay eligibility, and meal/rest break laws that exceed the federal standards.

Legislative Update

Administrative agencies like the DOL don’t need congressional approval to make changes to their rules. Instead, they publish proposed rules, seek public comment, and then publish final rules.

In July 2015 the DOL issued proposed regulations to modify the FLSA. The proposed regulations will impact who is exempt from overtime (salaried) and who is non-exempt from overtime (hourly).

The DOL is making these changes to get around congressional gridlock that’s prevented a minimum wage increase. Without a minimum wage increase, wages have stagnated for the last 10 years. The Pew Research Center estimates that the proposed FLSA rules will make nearly 5 million workers eligible for overtime.

The Proposed Regulations

The current salary test is $455/week, or $23,660/year. The proposed regulations will increase this to $970/week or $50,440/year. These limits may be updated annually.

The proposed regulations don’t specify changes to the “duties” test, but commentary leaves us wondering if the DOL will start to follow the California test. In California, if an employee spends more than 50% of their time doing non-exempt work, they are considered non-exempt. This is why most California Assistant Managers in the retail and restaurant industry are already classified as non-exempt or are classified as salaried + overtime.

According to the Office of Management and Budget, the agency charged with issuing new federal regulations, the new FLSA rules become effective in July 2016, which is only 3 months away. Employees are expected to incorporate new rules into their pay systems on the regulations' effective date.

Preparing For the Changes

Here are a few items that will help you prepare for these changes:

• Review your current job descriptions, and make sure they realistically state the job duties. Update them accordingly to make sure that your employees are properly classified.
• Determine whether/how to keep current salaried employees exempt from overtime.
• Design alternative FLSA compliant pay plans if you need to convert employees to non-exempt status. For example, utilize salaried + overtime classifications if possible.

Staffing Model Implications

 

Given the higher salary threshold and the changes to the duties test, it’s likely that field Assistant Managers, Restaurant Managers, and many corporate office employees will not retain the overtime exemption. These changes will require companies to become more creative with their staffing and scheduling. Some possibilities include:

• Transitioning to a part-time field management structure. This obviously creates more complex management requirements, but it’s also an opportunity to give Millennials the flexibility they crave and enhance your communication processes.
• Increasing General/Restaurant Manager’s scope of duty and salary to encompass several outlets instead of just one.
• Making sure you’re fully staffed with hourly employees. Remember, if you’re understaffed your managers are likely work that falls into non-exempt duties.
• Carefully managing scheduling at both the corporate office and field locations to avoid overtime costs.
• Consider implications to your bonus plans. If a bonus component is based on overtime management, you may be forcing your managers to perform non-exempt work, especially if they’re understaffed.
• Don’t forget that the DOL is also reviewing independent contractor statuses, so make sure you factor delivery people, IT team members, and contract recruiters into your 2016 labor budget.

Exiting Employees

Once the new regulations are effective, you should remember that any payroll deductions that result in an existing employee's salary to fall below the federal minimum wage will also make you subject to a penalty, and potentially change the status for that employee. Employers should make sure they have pre-acknowledged payroll agreements for all of their employees to make these deductions. Also, be careful about any deductions taken from final paychecks. You don't want a disgruntled ex-employee to call the DOL or your state agency charged with handling wage and hour audits.

The Takeaway

Significant regulatory changes require us to shift our perspective. This change will require us to implement smart strategies and innovate. Companies that raise the bar on creative staffing and scheduling will succeed. Just remember: the FLSA is a very complex law, so don’t go at it alone.