The U.S. Department of Labor’s (DOL) proposed amendments to the Fair Labor Standards Act (FLSA), will have an enormous impact on employers in the retail and hospitality industries.
If the rules stand as currently proposed, they will:- Dramatically increase the minimum salary required for most employees who qualify for FLSA white-collar exemptions
- Substantially increase in the minimum compensation required for an employee to qualify for the Highly Compensated Employee exemption
- Tie annual adjustments to these minimums to changes in the Consumer Price Index.
The DOL sought comments on two issues of importance to retail and hospitality employers:
- Whether changes should be made to the “duties tests” for the exemptions
- Whether employers should be allowed to use nondiscretionary bonuses to satisfy some portion of the minimum salary requirements for the executive, administrative and professional exemptions to the overtime requirements contained in the FLSA.
Currently, the DOL says it anticipates issuing final, amended, regulations in July 2016, although that predicted date is not set in stone and there is some indication they will be issued in late 2016.
Focus on on-site managers
At this point, retail and hospitality employers do not know what will be in the final amended regulations. It is clear, however, that the changes will have a significant impact on employers that apply the executive exemption to their on-site store managers, general managers and, in some cases, assistant managers.
There is an open question as to how much the DOL will increase the minimum salary requirements, but there is no doubt that there will be an increase of some amount.
When that change goes into effect, retail and hospitality employers will have limited choices in addressing how to handle employees currently classified as exempt, but whose salaries fall below the new minimum. Those employees may be affected by a new duties test as well.
The changes will have an enormous operational and financial impact, but they will also affect employee relations. Morale may suffer when newly nonexempt employees need to start tracking their time. They may feel they have been demoted to less prestigious positions within the company.
There is also a concern that the potential changes in minimum salaries may create a compression effect between the wages of employees and their managers in both the retail and hospitality industries. The changes could also create ripple effects in other areas, such as benefits.
To do now: Analyze data
What can retail and hospitality employers do now to prepare for the changes that are coming, given that the specifics of what the regulations will contain are currently unknown?
Once final regulations are issued, there will probably be a 60-to-90 day period before they go into effect. Depending on the size of the employer and the number of employees who may be affected by the anticipated changes, there may not be a lot of time in which to perform all the work necessary to make appropriate changes and ensure compliance.
We know that the minimum salary requirements for the white-collar exemption are going to be increased.
In order to determine how to respond to the increased minimum salary requirements, a company first has to collect and analyze data regarding exempt employee compensation—both salary and bonuses.
This analysis should identify the number of employees that are being paid at salaries between the current minimum of $23,660, and the 2016 minimum (which is expected to be $50,440).
Employers may choose to look at those employees as a whole or break down the group into small ranges (e.g., one set would contain exempt employees earning between $23,660 and $25,000, the next those making between $25,001 and $30,000, and so on).
It will be important to look at the impact of bonuses on overall compensation, since changing the bonus structure may be one of the options employers will be able to consider to ensure compliance.
In addition, employers may want to identify the number of employees who are currently being paid above the potential 2016 threshold. If an employer chooses to comply with the final salary regulations by increasing salaries at the bottom of the pay scale, it may need, or want, to increase the salaries of those who are paid above the new minimum as well—for purposes of perceived fairness, retention and morale.
Elizabeth S. Washko is the office managing shareholder of Ogletree Deakins’ Nashville office. Contact her at liz.washko@ogletreedeakins.com. Diane M. Saunders is a shareholder in the firm’s Boston office. Contact her at diane.saunders@ogletreedeakins.com.
