ALEXANDRIA, Va. — The Fair Labor Standards Act (FLSA) requires that almost every employer in the United States pay minimum wage for all hours worked and then pay overtime for hours worked in excess of 40 hours in a workweek.
There are dozens of different exemptions from those requirements. The most common are called the white-collar exemptions. As of Dec. 1, part of the white-collar exemption will change, and it will impact most businesses, including laundry operations.
Alex Passantino, office leader for Seyfarth Shaw’s wage and hour litigation practice group in Washington, D.C., discussed the new rule during the Textile Rental Services Association (TRSA) webinar called Understanding the DOL’s Final Rule on Overtime.
Besides working in wage litigation, Passantino is particularly knowledgeable on wage laws because he served as the deputy and acting administrator of the U.S. Department of Labor (DOL), Wage and Hour Division (WHD) from 2006 until 2009.
Last July, the DOL issued a notice of proposed rulemaking that allowed the regulated community to provide comment on the new overtime exemption rule. This gave everybody until September to make those comments. Passantino says there were 290,000 comments submitted, which the department reviewed.
“It turns out that the comments actually mattered,” he says. “The rule, when you print it out, turns out to be 500 pages. There are lots and lots of references to the comments that the employer organizations made and at the end of the day, the final rule is a little bit better than what was proposed.”
Examples of complaints included salary levels were going to be too high, adjusting the salary level annually was going to be too much, wanting to include bonuses in the salary level, and everyone was concerned the effective date was to be 60 days from notification of final rule.
Passantino says that the major change to the rule is that the minimum salary required to take advantage of the exemption has more than doubled.
Currently, an employee making $23,660 per year is exempt from being paid for overtime. As of Dec. 1, that salary level will go up to $47,476.
“The way this rule is applied, it is actually a salary on a weekly basis of $913 per week. We’ve just been shorthanding it with $47,476 a year because that makes a lot more sense to people,” Passantino says. “The real requirement is that the employee receive at least $913 per week on a salary basis.”
The new requirement is about $3,000 less than what was originally in the proposal.
“It’s not as low as everyone hoped the department would go, but it is some relief,” he says.
The original “theoretical basis” for the department to set the salary level was by using the 40th percentile salary level on a national basis. Passantino says the DOL switched that to the South because the South has a much lower salary level than the nationwide level.
One good development for employers, he says, is that for the first time ever, the salary level can be met with non-discretionary bonuses or commissions or other types of incentive pay.
It can be met in that way if those payments are made on at least a quarterly basis.
“If you have someone who receives those payments on a weekly, monthly or quarterly basis, you can use those amounts to satisfy the salary test and can go toward the $913 per week,” Passantino says. “These payments have always been permissible to salaried employees, exempt employees, but they have never counted toward the minimum salary level.”
He says the way this would work is the laundry would pay the employee 90% of the salary threshold, around $810 per week, and at the end of the quarter, if the individual didn’t earn enough to make up the difference in non-discretionary bonuses, incentive pay, or commissions, the company would have to bring them up to $913 a week for the quarter.
“You look at it on a quarterly basis. It’s a look back, and you have one pay period to correct if they miss,” he says.
The next big change, according to Passantino, is the unprecedented decision to update the salary level. For the first time ever, the DOL decided to increase, or update, the salary level every three years, automatically.
Before the new rule, such a change in the level would have taken a notice of rulemaking.
“This would short-circuit the process and make it happen on an automatic basis starting in January of 2020,” he says. “Every three years after that, it’s simply going to increase automatically.”
Passantino says the DOL is going to keep the salary level set to the 40th percentile in the lowest wage region in the Bureau of Labor Statistics (BLS) data set. At this time, that is the South region. It could change to the Midwest, if the region’s salary average drops. The new salary level will be posted in the Federal Register 150 days before it takes effect.
“The estimate is that the first increase on Jan. 1, 2020, will go from $47,476 to $51,168, then $55,108 [in 2023], then $59,351 [in 2026],” Passantino says. “Many economists out there believe this is a completely flawed analysis. It does not account for the fact that the salary increase in this year is going to significantly increase where the 40th percentile falls in subsequent years. This is going to be a much more dramatic increase, so we’re going to have to track this as it moves forward.”
Fortunately, laundries will know well in advance of Jan. 1, 2020, what the level will be, Passantino says. Experts will be tracking the salary data and have a good estimate before then.
Another change in the exemption involves the Highly Compensated Employee Provision.
This applies to employees who currently earn more than $100,000 per year, according to Passantino. This level is going to jump from $100,000 to $134,004 per year.
“You still have to meet the $913 per week in salary, and then at the end of the year you would take a look and see if the salary, plus commission and non-discretionary bonuses, come out to $134,004 over the course of the year,” he says. “If they don’t, you have one month after the end of the year to make a catch-up payment to get the person to that level.”
A positive in the rule changes, according to Passantino, is that there are no changes to what is known as the “duties tests.” Employees in certain jobs must also perform certain duties in order to be exempt. These duties fall under executive, professional and administrative categories.
“For the duties side, the employee who is performing functions that qualify for the exemption now will continue to perform functions that continue to qualify after Dec. 1,” he says. “The only thing you really need to worry about is the salary level. That may force you to come back around and look at the duties if you’re not willing to pay the new salary level.”
The salary basis test, which is the way a person is paid, the types of deductions that can be made, etc., didn’t change, either, Passantino says, only the amounts.
He says the Dec. 1 compliance date is another little piece of good news. In the initial proposed rule, laundries would have had only 60 days to come into compliance.
“It would have been nice to have a year or more to make sure everyone’s budget cycles matched up and make any adjustments you need to make without destroying your current year’s budget,” Passantino says. “Unfortunately, this rule will need to be in place for political purposes in advance of a presidential transition.”
He says that employers need to be aware that Dec. 1 is a Thursday, so that means the week that includes Dec. 1 will have to include the new salary level.
“Given everything that can flip when you’re implementing these types of programs, I think it’s important that rather than you look at the Dec. 1 date, you’re going to want to look at October, maybe early November to have everything in order,” Passantino says.
He says that his firm has talked to some companies whose payroll providers need about a month’s notice in order to make the changes that are required.
“If you’re switching people to non-exempt status in particular, you need to run through all the scenarios well in advance of that Dec. 1 date,” says Passantino. “This is not a last-minute issue; this is something that you need to be planning for well in advance, and you want to be as locked down as possible before Thanksgiving.”
In shorthand, he says, the new rule means that as long as someone is performing the job duties, if they make less than $47,476, they are non-exempt. Anyone making less than that amount, except for outside sales, has to be paid overtime. Anyone who makes more than that amount can continue to be exempt, provided that they perform the right job duties.
“So, in some cases, employers are going to increase the salary and continue to treat employees as exempt,” says Passantino. “That person that has a $45,000 salary, you may bump to $48,000 to remain exempt. That person who has a $45,000 salary and a $5,000 bonus potential, you may move to have a $48,000 salary and $2,000 bonus potential. It doesn’t mean that everything about their compensation package has to go up, but their salary does have to go above $47,476.”
In other cases, he says that employers are going to decide it’s too expensive and switch employees to non-exempt status, which means they will pay them overtime. Their job duties don’t necessarily have to change, but in many cases employers will choose to change those job duties.
“They may have two assistant managers, one more senior, and take some of the exempt functions the more junior person was performing, hand them off to the senior person and then increase the senior person up over the $47,476 level,” says Passantino. “And now you have an exempt assistant manager position, and you’ve made the other more junior person non-exempt, so you have a non-exempt assistant manager position.”
He says that laundries can have exempt and non-exempt employees within the same general classification. The company just has to make sure everyone is coded properly so they get paid properly.
The very first thing laundries need to do is to figure out who falls in the gap between the old level and the new level, he says. Next, model various compensation plans to determine the cost of raising salaries and the cost of reclassifying employees to hourly.
“There’s a lot to consider, whether it’s more expensive to pay somebody overtime or whether it’s more expensive to raise somebody up over the salary level,” Passantino says.
Have a question or comment? E-mail our editor Matt Poe at [email protected].