New Overtime Rules to Impact Arizona Employers

Beginning December 1, 2016, the minimum salaries for most exempt jobs will more than double, to $47,476 from the existing $23,660 required. On May 18, the U.S. Department of Labor dealt its long-anticipated regulatory amendments for “white collar” overtime exemptions under the Fair Labor Standards Act, which included increases to the mandatory base salary requirement.

The challenge for employers and employees alike will be determining whether certain jobs will continue as exempt positions, or whether they will be converted to non-exempt positions entitled to overtime pay. Early estimates anticipate that approximately five million workers will be directly impacted by the recent changes.

The White Collar Exemptions

Despite common misperception, an employee is not exempt from overtime pay simply because he or she receives a salary. Employees must meet very specific exemptions to qualify. Most of those exempt from overtime pay under the FLSA fall within one of several exemptions referred to as the “white collar” exemptions. To qualify for one of these exemptions, an employee must meet the specific job duty requirements for the professional, administrative or executive categories and, in addition, must be paid a minimum annual salary of $23,660. This minimum annual salary for these exemptions will bump to $47,476, or $913 per week.

A similar exemption, which also will be affected by the upcoming changes, applies to highly compensated employees. The duty responsibilities are relaxed for highly compensated employees to qualify for exempt status, so long as their annual salaries are set no lower than $100,000. This amount will increase to $134,004 effective December 1.

One of the upcoming additional changes will slightly improve an employer’s ability to satisfy the minimum pay requirements. Employers may apply non-discretionary bonuses and incentive pay (such as commissions) toward up to 10 percent of the salary requirement. These additional forms of compensation were previously inapplicable to the minimum salary requirement. For highly compensated employees, all non-discretionary compensation can be used to satisfy the $134,004 requirement above a minimum of $47,476 in salary.

The Continued Payout

The new increases have an even greater impact than may appear at first blush. For instance, with the amendments, the DOL has shuffled the deck with a new system that provides for automatic increases in the base salary requirement every three years. The increase will be based on wage data from the Bureau of Labor statistics, which is expected to warrant an increase in the minimum salary to more than $50,000 by 2020.

Employers evaluating whether to increase the minimum salaries for exempt employees will likely also evaluate its overall salary scale. Employees who have progressed to higher salaries may also expect an increase as their less-senior cohorts face mandatory increases effective December 1. While this is not mandated by regulation, employers should be prepared for it.

This, and similar considerations, represents perhaps the greatest gamble with the new regulatory requirements. The dramatic salary increase may prove too costly for many currently exempt positions, which may either be too costly alone or may not fit in existing salary scales. Employers will need to evaluate whether to increase salaries or transition currently exempt employees to non-exempt status. Some positions may face consolidation, and others may be eliminated. For those who lose their salary status, they may face a change in pay that is tantamount to a pay rate reduction, and may face stricter scrutiny by their employer when seeking overtime work.

Splitting the Odds

Whether employers increase salary for lower-paid exempt employees or transition them to hourly positions with overtime entitlement, employers must make changes. If they opt to increase employee salaries to continue a white-collar exemption, they must ensure that the affected exempt employees are paid the minimum $47,476 required, unless the employees qualify for exempt status under a variety of other exemptions. This, too, should be evaluated. For employers increasing salary, now also is a good time for them to evaluate exempt employee duties. As previously mentioned, not all salaried employees are exempt from overtime. They must meet certain duty requirements to qualify for white-collar exemptions. These duty requirements create a significant challenge for employers on a regular basis, and now is a good time to evaluate which employees qualify.

Conversely, employees who are transitioned to hourly positions should be prepared to properly track and account for their work hours. Many have developed practices consistent with receiving a salary, and may work flexible schedules. This may change as employers impose time clock or time sheet tracking systems on these employees.

Finally, employers should not focus exclusively on these changes to federal law, as state law may impose stricter requirements. While an employee may qualify as exempt under federal requirements, the employee may still be entitled to overtime pay under applicable state law.

Stepping Away from the Table

Other exemptions and alternative pay structures may provide employers and employees with some relief and should be evaluated. Furthermore, the duty requirements that were previously in place for the white-collar exemptions remain the same under the new rules, minimizing the disruption. Regardless of their chosen alternative, employers must plan and prepare for the change, rather than face investigation, fines and possible lawsuits for failed or incomplete implementation.

Chris M. Mason, an attorney with Jennings, Strouss & Salmon, PLC, counsels employers and management on all aspects of labor and employment law. He is also an experienced litigator, representing clients in Arizona, federal and appellate courts, as well as before administrative agencies.