The long-awaited changes to the Fair Labor Standards Act (FLSA) were proposed earlier this year on March 7, 2019. These new proposed rules, once finalized, will formerly rescind what was proposed in 2016. There is a high probability that the new rules will go into effect this time so it will be important to understand what they mean and how they may affect your business.
What is the Fair Labor Standards Act?
This statute dating back to 1938 is administered and enforced by the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL). The Department of Labor website provides a detailed explanation of which businesses are covered by the regulations. The FLSA establishes:
- The minimum wage
- Overtime pay
- Child labor standards
For an employee to be exempt from this law in terms of overtime pay, all three of the following tests must be passed:
- Salary Test – the employee must be paid on a salary basis, not impacted by hours worked
- Salary Level – the employee must be paid the minimum salary level
- Duties Test – the employee must have executive, administrative or professional duties as outlined in the regulations
What is Changing?
The proposed changes to the law are focused on the salary level test. The purpose of the salary level is to establish a “bright” line between non-exempt and potentially exempt positions. The current salary level is outdated as the last time it was changed was in 2004. The not-for-profits and industries such as retail, restaurant and banking will likely to be most impacted by this upcoming change.
Current Salary Level – $455/week or $23,660 annually
Proposed Salary level – $679/week or $35,308 annually (anticipate 1.1 million additional employees to be eligible for overtime)
Within Connecticut, the current salary level threshold is higher at $475/week. This amount will most likely be reviewed and potentially increased as a result of the federal regulations changing.
As mentioned above, all three tests must be met so even if the salary is above the new threshold, the duties the position performs must also meet the duties test.
To achieve this salary level:
- Up to 10% of pay can be paid in the form of incentives (e.g., commissions) and non-discretionary bonuses on an annual or more frequent basis.
- There is also an ability to pay out a catch-up payment within one pay period at the end of each 52-week period. In this scenario, employees must be paid 90% of the standard salary level per week ($611.10) throughout the year.
There is also an exemption related to highly compensated employees, where the duties test is less stringent (this exemption does not exist under the Connecticut Wage and Hour regulations):
Current Salary Level – $100,000
Proposed Salary Level – $147,414 (anticipate 201,100 additional employees eligible for overtime)
Moving forward, the Department of Labor is committed to reviewing the salary level and highly compensated employee total annual compensation threshold every four years. It will not be automatically increased as previously proposed in 2016. It will require a notice-and-comment rulemaking period before changes can be made to the salary level.
What Can You Do to Prepare?
It’s too early to act on the proposed changes but investing your time in preparing for the changes will be well worth it. This might include partnering with external experts to ensure you are well positioned when the changes go into effect.
- Audit your workforce.
- Analyze the data. Understand who might be impacted and where within the organization.
- Develop potential options, considering many different factors such as cost and employee impact.
- Educate your leadership.
- Begin the development of a communication strategy, considering who your potential audience might be and how you might message the change to each.
When Will these Changes Go into Effect?
The notice-and-comment rulemaking period just ended on May 21, 2019. The goal is to publish the final rules by the end of 2019. Legal experts are estimating that there will be a short window for implementation, ranging from 60-90 days. This could mean as early as late 2019 into early 2020.