Decision on White Collar Exemption Calls for Employer Action

After more than two years in limbo, US employers finally have clarity on the salary threshold for an important overtime exemption to the Fair Labor Standards Act (FLSA). Last week, the US Department of Labor (DOL) announced a new rule that addresses the salary level needed for so-called “white collar” workers — executive, administrative, and professional employees — to be considered “exempt” and therefore not entitled to overtime pay. Under the updated rule, the salary threshold will increase from $455 a week ($23,660 annually) to $679 a week ($35,308 annually).

The issue had been mired in uncertainty for more than two years after a federal court prevented a prior version of the rule from taking effect. That rule would have raised the salary threshold to $47,476, meaning that 4.2 million more Americans would be covered by the FLSA. The new threshold is instead estimated to extend overtime protection to just over 1 million workers.

Unlike the original Obama-era proposal, the new rule does not provide for automatic raises to the threshold to keep pace with salary increases;  rather, it relies upon a new rulemaking process to implement increases every four years. The new rule also allows employers to include "certain nondiscretionary bonuses and incentive payments" amounting to a maximum of 10% of the $679 per week threshold, and sets the total annual compensation requirement for the highly compensated employee exemption at $147,414 per year, a significant increase from the current level of $100,000 per year.

What Should Employers Do Now?

Many employers had made changes to accommodate the expected 2016 rule, while others elected to await implementation of a final rule that never came to pass. Regardless of how your organization responded back then, you should now consider the following steps:

• Conducting robust internal audits to identify impacted employees, ensure compliance with the current levels, and take a forward-looking view in light of the potential for future increases every four years.
• Determining whether to convert salaried employees making less than $35,308 per year to hourly employees, implement raises, or restrict the amount of overtime they are permitted to work.
• Considering a risk transfer solution to address the claims that are expected to follow this change in employment compliance.

Wage and Hour Protection

Despite a drop in claims frequency in the last three years providing modest relief to employers, wage and hour lawsuits continue to outpace all other types of workplace class-action litigation. These pernicious claims by employees include allegations that employers failed to pay overtime, did not provide adequate meal and rest breaks, or misclassified employees as exempt or as independent contractors.

In times of uncertainty, the protection afforded by wage and hour liability insurance is critical and can help transfer employee classification risks and provide coverage for defense costs, settlements, and judgments. As pricing and retentions for the coverage continue to fall and new insurers enter the marketplace, work with your insurance advisor to ensure adequate protection.