Do you have salaried employees? Do they earn less than $45,000 per year? Have you heard about the proposed wage threshold change for exempt employees?
Earlier this year (July 2015), the Department of Labor issued an 'NPRM' - Notice of Proposed Rulemaking - which is submitted periodically to update regulations covering various areas they govern, including wage and hour laws. Wage and hour laws are, among other things, drivers of minimum wage requirements. This particular proposed ruling would mean that employers must, in addition to ensuring the position passes the 'duties test', pay an employee in an exempt position between $800 and $1000 per week (assume that's around $45,000/year if full-time)*. The current wage threshold is set at $455 per week, meaning that in order to consider a position as exempt, the employer must pay at least that much in weekly wages. For a full-time employee, that equates to $23,660/year. Bottom line - if you have salaried employees currently making between $23,660 and (approx) $45,000 per year, you will be affected.
While it may seem excessive to propose raising a wage threshold by approximately 110% in one fell swoop, consider this - salaried exempt jobs are typically viewed as having more responsibility than hourly jobs and are often perceived to be higher paying jobs; the current threshold of $23,660/year is only 20% higher than the highest state minimum wage for hourly employees (Washington - $9.19/hour), and there are many cities across the country that have introduced living wage ordinances where the hourly minimum wage is in the range of $12 to $15 per hour. Federal minimum wage for hourly employees was set at $7.25/hour in 2008 but since then, 22 of the 50 states have implemented a state minimum wage higher than federal minimum wage. Cities and states are responding to the changes in economic conditions by acknowledging that hourly employees probably need to earn more than $7.25/hour to survive and support their families.
So, why would the DOL consider imposing such a significantly impactful ruling on employers? Well, first and foremost, because they were required to do something - in early 2014, President Obama issued a directive to the Secretary of Labor, Thomas Perez, to update and streamline the existing "white collar" exemptions. The fact sheet available on the DOL's website that explains the reasoning for the proposed ruling indicates a need to ensure wage thresholds are adjusted for inflation.
But there is another, underlying reason that is becoming more clear as time goes by, directly related to the first - as increased numbers of hourly employees vocalize their frustration and anger with employers at the low wages they receive in relation to economic pressures (remember the major protests outside McDonald's headquarters and WalMart stores across the country during the spring and summer of 2015?), surely it won't be long before salaried employees, who are not required to be paid overtime and can work as many hours as is necessary and required by the employer, start to do the same. And perhaps, instead of (or as well as) standing outside a major superstore or a fast-food restaurant with picket signs and bullhorns, these employees will just start to refuse to work all those hours. Because at the end of the day, whether a salaried employee works 32 hours or 62 hours in a week, he or she is (likely) going to be paid the same amount, and while a 32-hour week might allow that employee to pick up a second job elsewhere, 62 hours in a week probably would not (assuming a second job was even an option). The reality is that many full-time exempt employees work more than 40 hours each week; and most certainly do additional work above and beyond those 40 hours at other times when not in the workplace - answering emails after the kids have gone to bed, reviewing spreadsheets on the weekends in advance of budget season or fielding employee phone calls at any hour about schedules and call-offs.
And now we come to the dilemma that many thousands of employers are going to face, should this proposal become a final rule: overnight (likely sometime in the summer of 2016), the number of employees who will meet the exemption test will decrease dramatically and an employee who was being paid (for example) $25,000 or $35,000 or $45,000 and was working in an exempt position, will no longer be considered exempt. The employer will either face the prospect of instantly being required to classify that employee as hourly and pay overtime on every hour the employee works in a week over 40, or keeping the job in an exempt capacity and increasing that employee's salary to the new threshold (as previously mentioned, likely somewhere around $45-50k). That's a pretty big financial hit - likely hundreds of thousands of dollars for a mid-size employer with an employee population that is at least 35% salaried exempt. The DOL believes that "average annualized direct employer costs will total between $239.6 and $255.3 million per year".**
So, as an employer or a manager of people, what can you do to prepare? Certainly, read up on the proposal and understand its potential impact on your business (you can find good explanations here and here and here). Work with your HR and Finance teams (or a qualified consultant) to evaluate where you have risk and identify some options for mitigating that risk. There are various solutions to address the outcome of the proposal rule - while increasing the salary of each individual under the wage threshold is one, and converting those jobs to hourly positions is another, you could also consider redistributing job responsibilities to other exempt positions. It's going to be important to know what your options are, evaluate them and make informed decisions well before the Final Rule is imposed.
* The requirement is that an employee must be paid a weekly wage at or in excess of the threshold. The DOL's proposal is set to raise the threshold to somewhere between $920 and $970 a week - the final amount hasn't yet been confirmed; this amount is the 40th percentile of the typical weekly earnings for full-time salaried employees in the United States in 2013.