LEGAL: New salary threshold: Pay raise or demotion?

Jeff Jones.
Jeff Jones.

On May 18, the U.S. Department of Labor (DOL) published a final rule that almost doubles the current salary threshold for executive, administrative and professional (EAP) exemptions to overtime. The rule, which takes effect Dec. 1, is designed to plug a perceived gap that some feel causes many lower-level managers to be unfairly deprived of overtime when they work more than 40 hours.

The new rule will raise the salary threshold indicating eligibility from $455/week to $913/week ($47,476 per year) in 2016. This salary threshold will be updated automatically every three years, based on wage growth over time, to keep pace with inflation. But will the rule actually result in a raise for 4.2 million people, as DOL predicts? Or will it result in perceived demotions, restrictions on hours, and cuts in take-home pay? We shall see.

When the rule takes effect, employers will have the following options for bringing employees who are currently salaried and exempt, but earning less than $913/week, into compliance:

  • Make the employee hourly, monitor hours worked, and either:
  • Raise the exempt, salaried worker’s pay to at least $913/week, and prepare to increase that pay as DOL increases the threshold; or
  • Restrict the employee to working no more than 40 hours/week; or
  • Pay time-and-a-half for all hours worked over 40.

 

There is another option, approved by federal law but not allowed in a few states, of treating the employee as salaried nonexempt and paying them a guaranteed salary each week for all hours worked, plus a supplement of ½ times their regular rate for each hour worked over 40. The caveat for this pay method is that the full salary must be paid in all weeks in which the employee performs any work, even if the employee has used all vacation or sick leave time. Public-sector employers also have the option to pay overtime in the form of compensatory time off, within certain limits, in lieu of cash wages. Employers have the option of making the changes budget-neutral by lowering the hourly rate or salary and then paying overtime so that the weekly pay remains the same.

It remains to be seen as to whether these changes will result in employees getting a raise. It is likely that some exempt employees making close to the new salary level will see a pay increase, but many employers will simply shift salaried workers currently paid less than the new minimum to hourly status – with hourly rates that approximate their former salaries – and control costs by restricting overtime.

Many employees may perceive this as a demotion. There is more to salaried status than simply pay. For example, many employers make only salaried employees eligible for certain benefits like health insurance and retirement.

It also may make it more difficult for employees to reach the first rung on the management level. The old exemption threshold ($455/week) works out to about $9/hour over 50 hours, not an unusual rate for a starting-level assistant manager at a discount retail chain, for example. When the starting pay for a salaried managerial position moves up to $913/week, that means an effective rate of $18.26 per hour over 50 hours. The employer will wind up making more than twice the investment in the employee. Many small (and even large) employers may be reluctant to give inexperienced first-timers an opportunity to move up from hourly work to an annual salary in excess of $47,000.

Inevitably, job titles and descriptions will have to be retooled along with pay so that the distribution of work is in line with the dictates of the overtime regulation. There will also be an increased emphasis on tracking hours worked, and the potential for an increased number of claims for companies who failed to implement adequate timekeeping practices for all of the newly non-exempt employees.

Every employer with salaried, exempt employees earning below the new $913 weekly threshold needs to consider their options for compliance with the new rules before the Dec. 1 effective date.