Navigating Changes to the Salary Threshold for “Exempt” Employees

Aug 1, 2016 | Finance, Professional Services

Renea Saade

For more than sixty years, the US Department of Labor has held that certain executive, administrative, and professional employees, and other highly compensated individuals performing non-manual labor are exempt from the minimum wage and overtime pay protections under the federal Fair Labor Standards Act (FLSA). Most states, including Alaska, exempt similar workers from local minimum wage and overtime laws as well. Generally, in order for these exemptions to apply, employers have been required to establish that (1) an employee is paid a predetermined, fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the salary paid meets a minimum specific amount; and (3) the employee’s job duties primarily involve executive, administrative, professional, or other duties as defined by regulations.

Federal Threshold Doubles

Since 2004, the FLSA salary threshold under the test above has been $455 per week ($23,660 per year). Several states, including Alaska, have higher minimum thresholds. Currently, to qualify as “exempt” from local minimum and overtime wage laws under Alaska Statute 23.05.055(b), an employee’s weekly salary must be at least twice the amount a person would make working forty hours at minimum wage. Given the current state minimum wage rate of $9.75 per hour (effective as of January 1, 2016), this translates to a minimum of $780 per week ($40,560 per year).

In June 2015, the US Department of Labor proposed a new rule to update the criteria for FLSA exemptions. Industry experts and commentators predicted that by mid-2016, the FLSA salary threshold would be increased to more than $50,000 per year. There was also speculation that the federal minimum wage ($7.75 per hour) would be increased. Since the Alaska minimum wage is based on the federal rate (the law sets Alaska’s 2017 minimum hourly wage at no less than $1.00 more than the federal rate), folks have been waiting with anticipation to see what changes would be adopted.

The Department of Labor issued its final rule in May 2016 and set the new FLSA salary threshold at $913 per week ($47,476 per year) effective December 1, 2016. Although this final figure is slightly lower than expected, it is still more than twice the current federal threshold.

Under the final rule, the FLSA salary threshold will be adjusted every three years and set at a rate that represents the 40th percentile of full-time salaried workers in the lowest-wage US Census region (currently the South). In an apparent effort to help employers meet this new salary threshold, the final rule also provides that up to 10 percent of the new salary level can come from non-discretionary bonuses, incentive payments, and commissions, as long as said amounts are paid to the employee at least quarterly.

The final rule also institutes a higher salary threshold to be eligible for the “highly compensated employee” exemption to FLSA. Currently, if an employee makes $100,000 or more a year and performs at least one of the executive, professional, or administrative exemption duties, the employee is presumed to be exempt. As of December 1, the minimum salary threshold for this exemption will be $134,004 a year. The threshold will be adjusted every three years and set at a rate that represents the 90th percentile of full-time salaried workers on a national level. Alaska’s Department of Wage and Hour Administration appears to recognize this exemption as well, though it has not been expressly adopted by the legislature.

Do Not Delay Preparations

In order to adequately prepare for and address these changes in wage and hour law, Alaska employers should, without delay, determine whether the federal threshold applies to their company and/or their employees currently classified as exempt. Not all employers fall within the authority of the FLSA. For example, nonprofit organizations that generate less than $500,000 in business revenue and do not have any employees engaging in “interstate commerce” have a good chance of falling outside the FLSA’s reach.

If the FLSA does apply, the employer should, among other things, (1) consider the financial impact of compliance with the new threshold and whether changes to the operating plan or budget are necessary; (2) evaluate overall staffing structure and consider alternative options—for example, reclassifying certain positions as “non-exempt” or reassigning duties to avoid overtime hours; (3) evaluate whether any rates of pay should be changed; (4) determine whether any job descriptions or written policies should be updated; (5) evaluate whether any other benefits and/or non-monetary compensation terms can be changed to balance out changes to schedules or pay rates; (6) consult with payroll providers to ensure any changes occur seamlessly; (7) consult with a workers’ compensation broker to determine whether changing the status of any employees will impact coverage or premium rate; (8) consult with legal counsel to ensure any changes are made in accordance with law and in a way that minimizes legal risk; (9) timely communicate with any potentially or actually affected employees—they may have creative suggestions to help, and keeping an open line of communication can minimize uncertainty, speculation, discontent, and potential claims; and (10) stay informed as additional legislative changes and/or further guidelines may be issued in the coming months—the “Protecting Workplace Advancement & Opportunity Act” was recently introduced in both the US House and Senate (HR 4773/SB 2707) to readjust the FLSA salary threshold and the formula used to set it moving forward.

To learn more about the topics discussed, visit the following websites:

U.S. Department of Labor, Wage & Hour Division, https://www.dol.gov/whd

Final FLSA Rule www.dol.gov/whd/overtime/final2016/index

Alaska’s Wage & Hour Department http://labor.state.ak.us/lss/whhome

RENEA SAADE IS A PARTNER WITH THE ANCHORAGE OFFICE OF STOEL RIVES LLP. SAADE REGULARLY ASSISTS COMPANIES WITH THEIR EMPLOYMENT LAW AND COMMERCIAL BUSINESS NEEDS. SHE MAY BE REACHED AT [email protected] OR 907.263.8412. THIS ARTICLE IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY. IT IS NOT A SUBSTITUTE FOR LEGAL COUNSEL.

This article first appeared in the August 2016 print edition of Alaska Business Monthly.

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