The New Salary Requirements: Understand the Options and Liability

Tips for Employees to Avoid Disaster

As we reported in September, the Department of Labor has issued final rules increasing the minimum annual salary level paid to over-time exempt administrative, executive and professional employees from $23,660 to $35,568. In terms of weekly pay, the increase is from $455 per week to $684 per week. This change is expected to impact up to 1.3 million employees and, of course, will impact each of their employers. The new rules take effect on January 1, 2020, which requires prompt action by employers to prepare for the proper implementation of the new pay structure. While implementation could be as easy as increasing the salary to the minimum level, the cost of doing so will force many employers to consider other options which are more complicated than they appear at first glance.

What are the options?

• Simply increase the salary up to the new level. This may be the easiest option to implement but ironically may invite the most attention from the Department of Labor. The reason is that paying the minimum salary is only part of the test used by the Department of Labor in determining whether an employee is exempt from being paid overtime. The rest of the test includes an assessment of the duties performed by each salaried employee. Do they meet the definition of an administrative, executive or professional employee? If not, they lose their exempt status and are entitled to overtime time for hours worked over 40 in a work week. Many employers have not re-evaluated the actual duties of their employees for many years and simply assume that they fit one of the exempt employee definitions. They make this assumption at great peril as getting it wrong means that the employees are entitled to overtime for hours worked over 40 per week (at the new much higher salary converted to an hourly rate) plus damages equal to the underpaid amount and the employee’s attorney fees. These claims can be pursued by either the impacted employees or by the Department of Labor. Since many of the employees at issue work long hours, the liability can be significant.

There is another pitfall to consider with this simple option. If a number of employees are increased to the new level, what happens to those earning just above the new amount? At a minimum, there will be salary compression. Worse yet, there could be a mutiny by long- term employees who now have relative newcomers earning at or near the same salary.  As a consequence, adding compensation at the bottom will likely add it at other levels of the salary scale as well. The ripple effect of implementing the new base salary cannot be ignored if the employer wants to maintain workplace harmony.

Employers looking at the cost of this option should take into account that the new regulations allow non-discretionary bonus and incentive payments to satisfy up to 10 percent of the new salary level as long as the payments are made on an annual or more frequent basis. If the payments are non-discretionary and will be paid anyway then the true cost of this option is not has much as it may appear at first-glance.

• Employers can change the salaried workers to hourly and pay them overtime for hours worked over 40. Since most employers already have some hourly employees this will not be difficult to implement in terms of the process: the former salaried employees will have to keep track of their time in the same fashion as the other hourly employees. In practice, though, this conversion will likely be resisted by the newly converted employees who are used to the prestige associated with the exempt positions. They will miss the freedom of not having to account for every minute of their day and will find the process to be demeaning. Furthermore, after years of not keeping track of time, many will be revealed as not putting in the long hours they have claimed over the years and may actually post exaggerated hours to cover their tracks.

A major issue to consider in adopting this approach is the hourly rate to be used. Picking the wrong rate will result in either a major raise or a major reduction in income for the employee. If their current salary is divided by 40 to set the hourly rate, they will likely have a major increase in income if they work any substantial amount of overtime because they will receive one and half times their base hourly rate for their work over 40 hours per week whereas they used to perform the extra hours of work without extra compensation. Conversely, if an hourly rate is set low enough that, when combined with overtime pay, will produce their old salary, they stand to take a major cut in pay if they do not work the projected amount of overtime hours. Employers choosing this approach need to carefully assess how many hours the employees typically work so that their wages plus overtime do not end up higher than the new base salary level, which would defeat the purpose of choosing this option, and do not end well below their current salary which will invite morale problems.

• Leave the formerly exempt employees on a salary that is non-exempt from overtime. This preserves the status of the salaried position (although they do have to keep track of time) while not requiring payment of the new minimum level. Under this option, the employer and employee agree how many hours the fixed salary represents. The number of hours can be fewer than, equal to or greater than 40 hours per week. The salary can be any sum as long as the amount, when divided by 40 hours equals or exceeds the minimum wage which, in Michigan, increases to $9.65 per hour effective January 1, 2020. Using this option, employees are only paid the salary for actual hours worked and are paid overtime for hours worked over 40. Since this one is more complicated, here are some examples of this option:

Salary based on 40 hours per week. Assume that the employee used to receive a salary of $32,000. This amount equates to $615.38 per week or $15.38 per hour. If the employee works less than 40 hours the $15.38 is multiplied by the hours worked. If the employee works more than 40 hours then the employee receives $23.07 per hour for each additional hour (1.5 times the base rate). If the employee never exceeds 40 hours the annual pay will be the same $32,000 as paid in the past.

Salary based on 45 hours per week. Assume that the employee used to receive a salary of $32,000. This amount equates to $615.38 per week or $13.67 per hour. If the employee works less than 40 hours the $13.67 is multiplied by the hours worked. If the employee works the scheduled 45 hours the $615.38 is paid plus the employee receives half time pay of $6.83 per hour for the hours worked between 40 and 45 which results in an additional $34.17 per week. Hours worked beyond 45 would have to be paid at the rate of $20.50 per hour (one and half times the base rate of $13.67). If this employee works only the calculated 45 hours per week he or she would receive a total of $33,777.10 per year ($32,000 base plus $1777.10 in overtime) which is still a couple thousand dollars less than the new salary floor.

The penalty box for getting it wrong.

As noted above, an employee that is not paid the required overtime or base salary is entitled to receive not only the amount that should have been paid but an additional equal amount as a penalty. The employee is also entitled to his or her attorney fees for obtaining the proper payment. While the normal look back period is two years, it is expanded to three years for willful violations. Given the well -publicized nature of the new regulations, employers who get it wrong may well face three years of damages. Depending on the number of employees involved, the exposure to damages can be significant. Even if a legally compliant policy is implemented, there are major work place problems that may arise if the implementation does not take into account the workplace pitfalls and issues discussed above.

The Employment Team at Rhoades McKee stands ready to assist any employer with questions or concerns regarding compliance with the new salary regulations or how to best implement them in a way that is least disruptive to their work force.