As we have previously reported, the U.S. Department of Labor’s (DOL) proposed amendments to the Fair Labor Standards Act (FLSA), specifically as to the criteria for the Part 541 “white collar” exemptions, are projected to have an enormous impact on retail and hospitality employers. If these amendments are made final without revision, they will result in: (1) a dramatic increase to the minimum salary required for most of the employees who qualify for white collar exemptions; (2) a substantial increase in the minimum compensation required for an employee to qualify for the Highly Compensated Employee exemption; and (3) annual adjustments to these minimums tied to changes in the Consumer Price Index.
The DOL also sought comments on two issues of importance to retail and hospitality employers: first, whether changes should be made to the “duties tests” for the exemptions, and second, whether employers should be allowed to use nondiscretionary bonuses to satisfy some portion of the minimum salary requirements for the executive, administrative, and professional (EAP) exemptions to the overtime requirements contained in the FLSA.
Currently, the DOL anticipates issuing final amended regulations in July 2016, although that predicted date is not set in stone. Not only does the DOL have an enormous amount of work to do in sifting through the thousands of comments it received regarding the proposed amendments, but any estimate as to the timing of the final rule should not overlook the potential impact that the November 2016 elections could have on this process.
At this point, retail and hospitality employers do not know what will be in the final amended regulations. However, it is very clear that the DOL is contemplating changes that will have a significant impact on employers that have employees classified as exempt under the white collar exemptions—in particular, retail and hospitality employers that often appropriately apply the executive exemption to their on-site store managers and 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—and whose duties may be impacted by a new duties test as well. The changes will not only have an enormous operational and financial impact, but also an employee relations impact as well. Morale may suffer as newly nonexempt employees will need to track their time and 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 will also have a ripple effect in other areas, such as benefits.
One important question is: 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 the final regulations are issued, there likely will 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, that may not be a lot of time in which to perform all the work necessary to make appropriate changes and ensure compliance.
Here are some steps that retail and hospitality employers can take now to start getting ready for the amended regulations to come.
Step 1: Collect and Analyze Salary and Pay Information
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 numbers 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). The employer may choose to look at these employees as a group 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). The employer should also look at the impact of bonuses on overall compensation since changing the bonus structure may be one of the options an employer will be able to consider to ensure compliance.
In addition, the employer may want to identify the numbers of employees who are currently being paid above the potential 2016 threshold. If the employer chooses to comply with the final salary regulations by increasing salaries at the bottom of the pay scale, the employer 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.
Step 2: Collect and Analyze Information Regarding Job Duties, Work Hours, and Staffing Needs
In anticipation of the DOL’s amended regulations modifying the job duties tests for some or all of the white collar exemptions, employers should prepare by developing a good understanding of the work their exempt employees actually perform, both in job description and in day-to-day reality. A job description that is divorced from the reality of the job duties exempt employees are performing will not provide an effective or complete picture. Employers may need to conduct on-site observations, interviews, or surveys of employees to determine what they do on a daily basis.
Once the employer has an effective analysis of its exempt employees’ actual job duties, it will be in a much better position to determine what, if any, changes need to be made to those job duties in order to comply with any new job duties tests. The employer will also be in a better position to make a decision that certain duties cannot be modified and that, by necessity, the position will need to be classified as nonexempt.
If possible, the employer also should try to obtain valid information as to the number of hours its exempt employees are working on a weekly basis—ideally including the number of hours they are working on specific job tasks. This may be quite difficult given that many employers do not require their exempt employees to record their work time, and even fewer require exempt employees to code their work time to specific tasks. Again, however, employers may need to obtain such information through formal surveys, informal surveys, direct observation, interviews, or some other method. Having this information will help the employer conduct an analysis of the potential costs of converting some or all employees in a particular exempt classification to nonexempt.
Employers should also collect data on their staffing needs and usage to determine patterns across locations and operating times. Data on staffing usage can be used to identify and predict the amount of overtime hours that may be required if exempt employees are reclassified. It also can be used to maximize efficiency and eliminate unnecessary labor hours. It may also be useful in evaluating the shifts and locations where managers are most likely to be supervising multiple employees.
Step 3: Consider Potential Changes to Meet the Expected Amendments
While it is admittedly hard to identify changes that will be necessary to meet amendments that haven’t yet been finalized, retail and hospitality employers know enough now about the changes being contemplated to start thinking about what may need to be done in order to comply. Here are a few possibilities to consider:
- Increase the salaries of exempt employees to the new minimum.
- Reduce or eliminate bonuses for those exempt employees whose salaries and bonuses may meet the new minimum—and increase their salaries by these bonus amounts.
- Reclassify exempt employees and pay them hourly.
- Reclassify exempt employees and change their compensation structure to pay them on a commission or fluctuating-workweek basis.
- Change staffing levels in certain locations and at certain times to eliminate unnecessary overtime hours.
- Change benefit plans as necessary for managers who are reclassified as nonexempt.
- Change job duties of managers as necessary to continue to meet the duties test.
- Change timekeeping practices and systems as needed if managers are reclassified as hourly, nonexempt employees.
Step 4: Model Potential Changes
With the data and analyses referenced above, an employer can begin the process of developing models as to the potential costs and effects of the different ways to respond to the proposed regulations. For example, an employer may calculate the potential costs of increasing all exempt employees to a new minimum salary level, then separately calculate the potential costs of converting some or all exempt employees in a particular classification to nonexempt, hourly employees. Calculating various combinations of these costs will provide employers with a better understanding of the effects of these changes on their organizations.
Employers should also consider other potential consequences that may accompany such changes. For example: Will the employer’s benefit plans need to be modified? Will any timekeeping practices and systems need to be changed if managers are reclassified as hourly, nonexempt employees? How will changes in the compensation of currently exempt employees affect the internal equities in the compensation of the employees above and below them? What will the promotion track for managers look like after the changes?
In addition, employers need to consider the intangible consequences of the changes that may not directly translate into dollars and cents. For example, a study commissioned by the National Retail Federation concluded that the vast majority of retail and restaurant managers who participated in a survey reported that the conversion of managers from exempt to nonexempt status would have negative consequences for the managers and customer service. In addition to hampering their ability to truly manage, many surveyed managers believed they would make less money as nonexempt employees due to lost bonus opportunities that would accompany the loss in their ability to manage and control outcomes and profitability for their establishments. Thus, retail and hospitality employers need to consider the risks associated with managers becoming dissatisfied with their newly nonexempt roles and evaluate whether this factor will weigh against reclassification—and if so, identify ways to mitigate the adverse consequences to the management workforce.
Step 5: Prepare Management for the Potential Changes
If in-house counsel and human resources have not already started this process, they should start sooner rather than later. Operations and management executives and supervisors need to be educated as to the DOL’s proposed changes, as well as the potential effects on the business and on employee relations. They also need to be prepared to respond to those changes—taking into account the analyses and modeling discussed above, other business considerations specific to retail and hospitality employers, and potential employee morale and turnover issues. The earlier this process is started, the better the chances of having a preliminary plan in place for when the final amendments are issued.
Given the current status of the proposed overtime amendments, most employers will not be in a position to implement changes that can adequately address the anticipated final regulations (unless they plan to simply convert all white collar exempt employees to nonexempt). However, once the final regulations are issued, retail and hospitality employers that have taken the steps listed above will be in a good position to make the decisions necessary to comply with the new rules by their effective date and in a manner that causes minimal business disruption.