Decoding the Possible Fair Labor Standards Act Changes

For most of July, many Human Resource professionals have been discussing the recent proposed changes to the Fair Labor Standards Act regulations. Some aren’t aware of the possible impact the new proposals could have on their organizations.  Considering the Department of Labor (DOL) projects that if enacted, this adjustment could impact roughly 4.7 million workers, the proposed changes should be reviewed. In this issue of Astronology we look into these potential changes to the FLSA and what they mean to you.

What is the Purpose of the FLSA?

                  

The Fair Labor Standards Act (FLSA) is the federal government’s primary means to establish minimum wage, overtime pay, recordkeeping, and youth employment standards for the private sector and federal, state, & local government employers. Currently, the standards, in summary format, are as follows:

• Minimum wage: Federal minimum wage is set at $7.25.
• Overtime: Employees classified as “non-exempt” through the FLSA exemption test process must receive overtime pay at a rate of not less than 1.5 times their regular rate of pay. Overtime is paid if the non-exempt employee works over 40 hours per workweek.
• Hours Worked: The hours worked ordinarily, including time spent on the employer’s premises, on duty, or at a prescribed workplace.
• Recordkeeping: Part of the standards for recordkeeping include displaying an official poster outlining the requirements of the FLSA, as well as keeping records of employee time worked and pay.
• Child Labor: Designed to provide protection to educational opportunities of minors, and prohibit minors’ employment conditions that could be detrimental to their health and well-being.

The proposed adjustments affect the minimum wage and overtime regulations.

What are the Proposed Changes?

                  

First, the proposal seeks to raise the minimum salary level used to identify exempt white collar employees. Instead of setting a salary amount, the FLSA proposal would set the minimum salary level equal to the 40^th percentile of weekly earnings of full-time salaried workers, based on data released from the Bureau of Labor Statistics (BLS). It is projected that in 2016, the year the proposal would be in effect, this level will be $970 per week ($50,440 per year). The salary and compensation levels would be indexed to this BLS data and updated annually, which would eliminate the need to make further adjustments in the future.

                  

The Highly Compensated Employees (HCE) exemption would also be revised. The National Law Review online mentions that currently the exemption applies to employees who earn a total annual compensation of $100,000 or more, and “customarily and regularly” complete the duties of exempt employees or have responsibilities similar to that of an executive, administrative, or professional employee. The DOL seeks to initially raise the current threshold of $100,000 to $122,148 per year.

Am I Affected By These Possible Changes?

                  

If you haven’t done a classification audit recently, perhaps. The National Law Review projects “The DOL’s proposed changes will likely only trigger more activity by private litigants and federal & state agencies.” They suggest to organizations that haven’t conducted a classification audit in some time to consider doing the following:

1. Evaluate the classification status of workers carefully at the outset of the work relationship, to determine whether a worker is exempt or overtime eligible.
2. If you inherit a large number of exempt employees, such as following an acquisition or a merger, perform due diligence to determine if there is potential for misclassification liability.
3. Conduct a privileged audit of your exempt employees and positions to determine what portions of your workforce will be affected by the proposed new rules. For example, assuming that the DOL’s projections are accurate, employers should be prepared to increase the salaries of exempt workers who earn less than $50,400 per year, to reclassify those individuals to overtime eligible, or to take other measures to address the increased costs.

Also, keep in mind we are currently within the 60-day public comment period. The DOL is required to review and respond to all issues raised by comment.  JD Supra Business Advisor online comments:

• What, if any, changes should be made to the duties tests?

• Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?

• Should the Department look to the State of California’s law, requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty, as a model? Is some other threshold that is less than 50 percent of an employee’s time worked a better indicator of the realities of the workplace today?

• Does the single standard duties test for each exemption category appropriately distinguish between exempt and non-exempt employees? Should the Department reconsider the decision to eliminate the long/short duties tests structure?

• Is the concurrent duties regulation for executive employees, allowing the performance of both exempt and non-exempt duties concurrently, working appropriately, or does it need to be modified to avoid sweeping non-exempt employees into the exemption? Alternatively, should there be a limitation on the amount of non-exempt work? To what extent are exempt lower-level executive employees performing non-exempt work?

“Most importantly, during this period, in addition to comments on the salary level proposal, the Department of Labor’s Wage & Hour Division (WHD) also seeks comments on the following questions:It is important to note that the Federal Wage and Hour Commission has taken on an activist role when it comes to enforcement of FLSA regulations. According to Littler, “Wage and hour disputes have become the most common source of substantial, employment-related liability facing employers today. The number of class and collective actions has soared due to plaintiff-friendly laws, mounting government enforcement efforts and the increasing amount of information available to employees.”   As such, the Astron Solutions team urges all to remain vigilant with respect to both how jobs are classified and in how regulations are followed.

Astronology readers! Are you considering the possible effects the new proposal could have on your organization? You can voice your concerns to the WHD electronic through the Federal E-rulemaking Portal at http://www.regulations.gov.

CEO Pay Controversy

In the last few months, there’s been a lot of conversation on executive pay. CNBC news reported that in 2014, “the average S&P 500 company CEO made 373 times the salary of the average production and non-supervisory worker in 2014.” This is an increase from the 331 times the salary average in 2013. Why the sharp increase? What about the recent news of Unilever CEO Paul Polman’s reaction to his own salary? Astronology takes a brief look into executive pay.

                  

According to the aforementioned CNBC report, a survey by the Hay Group in 2013 found that 37% of CEO pay was in cash, while the percentage paid in stock and stock options was 54%. It was also discovered that a number of companies added the stock option to CEO packages after the 2008 financial crisis. The thought behind this move was that since stocks were low, “giving execs equity was likely to make them richer in the longer term.” Considering that CEO pay is typically not tied as much to performance but more so the size of the company, it’s easier to see that the combination of these factors may be part of why CEO pay has gotten so high.

                  

Paul Polman, the current CEO of Unilever, revealed recently to the Washington Post that he was “ashamed about the amount of money” he earns. In general, Polman is considered “a global business leader with a conscience.” The CEO of Gravity Payments took this concept a step further.  He announced in April of this year that he would be raising the company’s minimum wage to $70,000. This is a $22,000 per year increase for its 120 workers. How does he plan to make this work? By reducing his $1 million annual salary to the company’s new minimum wage of $70,000. Forbes.com mentioned that the company will also have to allocate roughly 75 to 80% of its annual $2.3 million profits to further the minimum wage change.

                  

Currently, there has been robust debate on whether implementing some form of pay for performance in executive pay could help with at least justifying executive pay levels. One particular aspect is the SEC’s proposed mandated “compensation actually paid” (CAP). This mandate would require more disclosure of executive pay, including more transparency to the company. However, some feel like this mandate will only give a “hazy” link to pay for performance. This means the search is still on to find a way to understand and regulate executive pay.

Has your organization been faced with dealing with repercussions from high executive pay? Are you searching to find a way to link executive pay to performance? Write to Astronology, and tell us what your attempts have been, or if your organization has found some sort of solution.  We look forward to hearing from you!