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HR Connections: Updating the Dept. of Labor’s white collar exemptions

“Sometime in the spring … in the northern hemisphere.” 

That was the answer federal Labor Secretary Thomas Perez gave when asked about the timing of his department’s proposal for updating the overtime exemption rules under the Fair Labor Standards Act. Given the announced timeline for the U.S. Department of Labor to issue the still-outstanding Notice for Proposed Rulemaking was originally November 2014, and then February 2015, such a broad response, while amusing, was not surprising.Cania,-Frank

Officially titled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” the changes stem from a mandate by President Obama, first in his 2014 State of the Union address, and then officially sent to Secretary Perez in March 2014. At the core, two of the three required tests will be addressed; salary threshold and duties.

The role of the USDOL is to “define and delimit” the white-collar exemptions, 29 U.S.C. 213(a)(1). Setting a salary threshold in one way it differentiates positions which do, from those that do not qualify under the exemptions. Historically, the USDOL has reviewed the salaries paid to employees at the time of the evaluation.

Factors have included the range of wage levels and pay structures in various industries, real prevailing salary levels across the nation, varying economic conditions in several geographic regions, the divergent circumstances of metropolitan areas vs. small towns and rural areas, small business concerns and the potential inflationary impact. Once a salary range is established, a threshold is set that will best accommodate the extreme variations across the nation.

The salary threshold continues to garner extensive interest, with employee rights groups, organized labor, members of Congress and others advocating for an increase in the salary threshold from the current $23,660, to an amount ranging from $42,000 to more than $60,000 annually. Further, on Jan. 16, U.S. Rep. Mark Takano (D-Calif.) and 31 additional House Democrats sent a letter to President Obama and Secretary Perez calling for a threshold of at least $69,000 (http://1.usa.gov/1Jgs9Z3). While the basic motive of these advocates may be commendable, arguably to provide financial help the greatest number of American workers, it is completely illegitimate.

Since 1938, the USDOL has established a salary threshold below which a white-collar exemption is not available. More precisely, this threshold is intended to “furnish a practical guide … in borderline cases … by providing a ready method of screening out the obviously nonexempt employees,” (Report and Recommendations on Proposed Revision of Regulations, Part 541, U.S. Labor Department, March 1958, at 2-3). The threshold is not, however, intended to help workers based on poverty concerns, nor is it a minimum wage or living wage for exempt employees.

The USDOL “is not authorized to set wages or salaries for (exempt) employees. Consequently, improving the conditions of such employees is not an objective of the regulations. The salary tests … are essentially guides in distinguishing bona fide executive, administrative and professional employees from those who were not intended by Congress to come within those categories. Any increase in the salary levels … must, therefore, have as its primary objective the drawing of a line separating exempt from nonexempt employees rather than the improvement of the status of such employees,” (Report and Recommendations on Proposed Revision of Regulations, Part 541, U.S. Labor Department, June 1949 – emphasis added).

Further, the salary threshold operates “as a guide to the classification of … employees and not as a barrier to their exemption,” ibid (emphasis added). Yet advocates calling for a two- or three-fold increase in the salary threshold seem to want just that.

According to representatives from the regulated community who attended private “listening sessions” with Secretary Perez, he asked, “What changes can we make to ensure store managers and assistant managers who spend most of their time performing nonexempt work, such as running a cash register and stocking shelves, cannot qualify for the executive exemption?” A significant increase in the salary threshold would do just that, by creating a barrier to entry.

The white-collar duties tests are also under review. Here the USDOL may impose a specific percentage of time (i.e. more than 50 percent) employees must spend performing exempt duties each week. Or, alternatively, set a 50 percent limitation on nonexempt work performed to maintain the exemption. Again, for more than 60 years the percentage of time spent on exempt work has been a useful guide, not a singular test.

Today’s employees can perform a wide range of exempt and nonexempt duties – often concurrently – and partially due to continuous advances in technology. Setting inflexible duties tests, predicated on a minimum percentage of time spent performing exempt duties, would be arduous and impractical.

In areas such as hospitality and retail, spikes in customers, or employee absences, cause salaried managers to assist hourly associates with taking and filling orders, stocking shelves and at cash registers. The days of executives dictating letters and memos to be typed and copied by a secretarial staff is nothing more than a “Mad Men” episode. Today, exempt managers and supervisors may have little administrative support and multitask continuously. Strict duties tests would further frustrate their efforts with additional requirements to prove an allowable percentage of nonexempt work hasn’t been exceeded each week.

Ensuring fewer employees qualify for exemptions – something Secretary Perez clearly views as a mandate – is unlikely to benefit employees. First, the FLSA dictates how a nonexempt employee is paid, not how much. Faced with the changes discussed here, employers will likely react in one of two ways. Raise the affected employees’ salaries to levels required for exempt status. Or, more likely, convert each affected employee’s base salary to an hourly rate, not less than minimum wage, resulting in virtually no increase in total compensation. For example, an employee averaging 45 hours per week and paid a $700 salary, would be paid $14.74 hourly. ((40 hours × $14.74) + (5 hours × (1.5 × $14.74)) = $700.15).

In addition, as someone who has informed dozens of employees that their positions have been reclassified from exempt to nonexempt, I can say almost without exception, these employees strongly resent the change. It is viewed as a demotion and an insult to their professional and social status in the workplace.

Regardless of how thoughtfully and empathetically the situation is explained, employees voice concerns over the loss of professional growth opportunities, become angry about new limitations on workplace flexibility they previously enjoyed, and take the move as a personal and professional insult by their employer.

Regardless of which side of this debate the final rules fall, it is going to take some time to get there. The 2004 update to the white-collar exemptions took almost 17 months from the time the NPRM was released, to the date the new rules became effective. That process hasn’t even started.

When this NPRM is released, employers and their representatives should immediately review and evaluate the proposed changes, noting the likely impact to their businesses. Next, submit substantive written comments to ensure the USDOL is aware of businesses’ recommendations, concerns and criticisms. Employer comments have historically resulted in substantial changes and significant improvements to final rules. These comments can also be the basis for court challenges and other efforts to overrule potentially ill-advised regulations.

Frank A. Cania, M.S.Emp.L., SPHR, SHRM-SCP, is president and managing partner of DRIVEN HR LLC, a Fairport-based human resource consulting firm providing HR audits, outsourced HR management, employee handbooks and a variety of other services. Frank concentrates on wage-and-hour, FMLA, ADA, Title VII and Form I-9 compliance, as well as workplace investigations. This article is brought to you by the Rochester affiliate of the National HR Association, a local professional HR organization focused on advancing the career development, planning and leadership of HR professionals.

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