Sent from My Smartphone

Sent from My Smartphone

Upcoming changes to the Fair Labor Standards Act salary-basis test may convert many of your smartphone-toting exempt employees into non-exempt employees, requiring you to track the evening and weekend time these employees spend thumbing their way through work email or risk being hit with penalties for failing to account properly for their work hours. This FLSA salary-basis change, which is anticipated sometime in 2016, will more than double the minimum salary requirement of employees who fall within the “white-collar” (administrative or executive) exemptions of the FLSA. Therefore, if implemented, institutions will have to make a choice – increase the exempt employee’s salary to retain the exemption and avoid overtime compensation, or keep the current salary, but lose the exemption and begin to track and pay overtime.     

This article provides a general backdrop on the current “white-collar” exemptions, and offers practical recommendations to prepare for the anticipated salary-based change.  

Application of the Current “White-Collar” Exemptions to Academia
Institutions of higher education commonly rely on two of the FLSA’s “white-collar” exemptions that the proposed rule will affect – the administrative exemption and the executive exemption. To qualify for either exemption, FLSA requires that the employee perform certain duties (i.e., the “duties test”). Under the current duties test:

  • the administrative exemption applies to individuals who perform “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers” and whose “primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.” 29 C.F.R. § 541.200(a)(1) and (2); and 
  • the executive exemption applies to individuals who manage two or more people, whose “primary duty is management of the enterprise . . . or . . . a customarily recognized department or subdivision thereof” and who have the authority to hire and fire or whose recommendations regarding “hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.” 29 C.F.R. § 541.200(a)(2)-(4). 

Both exemptions also set a minimum salary requirement in order to qualify as an exempt employee. The current salary requirement, set in 2004, is $455/week or $23,660/year.  

Importantly, because both the administrative and executive exemptions set a minimum salary requirement for qualification, both will be subject to the minimum salary increase under the anticipated rule change. There is, however, one exception pertinent to academia – faculty will continue to fall within a separate FLSA exemption (“the learned professional exemption”), and will continue to be exempt regardless of this salary-based change.

A Need for Change 
On March 13, 2014, President Obama issued a presidential memorandum directing the U.S. Department of Labor to modernize and streamline the overtime regulations and update the “white-collar” exemptions to keep pace with the modern economy. Many industry experts believed a complete overhaul was in the works both to the duties test and to the minimum salary requirement. Nonetheless, the Department of Labor issued a proposed rule addressing only the salary minimum (effectively doubling the minimum salary for white-collar exempted employees), leaving the current duties test unchanged.  

As part of the rulemaking process, however, the Department of Labor sought comments on both the salary minimum and the duties test in the proposed rule, and received almost 300,000 comments in response. The Department of Labor is currently reviewing those comments and expects to issue a final rule increasing the minimum salary requirement later this year with an anticipated effective date of sometime in 2017. No change to the duties test is anticipated. 

The Proposed Rule 
The proposed rule raises the minimum salary for the “white-collar” exemptions to the 40th percentile of full-time, salaried workers nationwide. For 2016, this is estimated to be approximately $971 per week or $50,440 per year. The proposed rule also pegs the minimum salary to the 40th percentile on a going-forward basis in an attempt to keep it current with market wages and reduce the need for future rulemaking changes. In addition, the minimum salary for highly compensated individuals will rise from $100,000 to $122,148 per year in 2016 and will likewise automatically adjust to keep pace with the top 10% of full-time salaried workers. This will have an effect on those employees performing office or non-manual work and otherwise performing at least one responsibility generally associated with the executive, administrative or professional exemption; in other words, the vast majority of administrators in a college or university setting. 

Effect of the Proposed Rule
The driving force behind the recent change was retail managers – and for good reason. Retail managers often fall within a “white-collar” exemption and are paid the minimum salary without any entitlement to overtime, despite working far more than 40 hours per week (almost to the point that they are barely making minimum wage if their salary is converted to an hourly rate). To address this disparity, the Department of Labor proposed the increased minimum salary. This increase, however, will have a far more reaching effect than just the retail industry. 

Any exempt administrative or executive employee – in any industry – who is making less than $50,440 per year will lose the exemption unless his or her salary is increased. As noted above, faculty will remain FLSA-exempt under the soon-to-be-final rule, but administrative assistants making $45,000 per year will no longer be exempt. Exempt employees in the “middle manager” ranks (a facilities manager, an HR administrator, etc.) making less than $50,000 per year will need to be evaluated to determine if increasing their salaries to the minimum established in the proposed rule makes practical sense. Many of these employees are likely accustomed to casually answering emails on their phones or logging in remotely to finish an assignment. And while the FLSA does recognize a de minimus exception to compensable time for things like checking email, it is not recognized by all courts and those courts that do recognize it, differ in what constitutes a “de minimus” amount of time. Without the “white-collar” exemption, all time worked must to be tracked and compensated as overtime when appropriate. 

What to Consider Now
Colleges and universities should take a close look at employees falling within the administrative and executive exemptions. For employees making close to the salary minimum now, it likely does not make economic sense to more than double their salaries to stay within the exemption because any potential overtime they will work will likely not exceed the new salary minimum required to keep them exempt. Obviously, the employees making closer to the new salary threshold need to be examined more thoroughly. Colleges and universities should consider tracking their hours now to make an informed decision about their salaries once the final rule becomes effective. In addition, institutions must train these employees and their managers (1) to ensure they are aware of the obligation to keep track of their time, on and off the job, so that they are paid properly, and (2) to remind them of the institutions’ policies regarding advance notice before working overtime.  

Prudence dictates that colleges and universities revisit their pay and overtime policies, as well as the classification of employees close to the new threshold to ensure that those employees are classified appropriately and that the institution has the proper mechanisms in place to convert employees as necessary and comply with recordkeeping requirements. And, keep in mind that it remains possible that the Department of Labor could also modify the “duties test,” requiring yet another fresh look at many of these same employees to analyze their exempt or non-exempt status.  

Saul Ewing’s Higher Education Practice has been working with institutions to address these FLSA issues and update their policies and procedures, and is available to assist your institution in complying with the forthcoming rules. 

This article appears in the Spring 2016 edition of Saul Ewing’s Higher Education Highlights newsletter. Click here to see the complete newsletter.