This article was originally published in Law360, New York (June 6, 2016, 10:32 AM ET)
With all the recent publicity surrounding increases in state and local minimum wage requirements and concern about how those increases could affect auto dealers, recent changes to another set of employee compensation rules have received substantially less attention. The U.S Department of Labor has made changes to its regulations that will more than double minimum salary requirements for while collar workers, which warrants proactive planning on the part of dealers and businesses in general.
Aren’t white collar workers exempt from overtime and minimum wage requirements? Not necessarily. Under the federal Fair Labor Standards Act, many white collar employees — including primarily executive, administrative and professional personnel — are exempt from federal overtime pay and minimum wage requirements if the employee is paid a minimum salary of $455 per week or $23,660 annually, and performs primarily executive, administrative or professional duties, as set forth in federal regulations.
Another white collar exemption category, the “highly compensated employee,” has a less rigorous duties test and currently a minimum salary threshold of $100,000 per year.
So salaried, white collar workers are exempt from minimum pay requirements only if they earn at least a minimum threshold already. If they earn less than that threshold, they are not exempt, and are subject to minimum-wage requirements. The DOL has enacted changes that would dramatically increase the number of white collar employees who are subject to the minimum wage.
Effective Dec. 1, 2016, the minimum salary threshold will increase to $913 per week, meaning that white collar employees who earn less than that ($47,476/year) would now be subject to minimum wage requirements. The department asserts that this threshold increase is appropriate because it is a more likely realistic salary demarcation between those who truly perform the duties of white collar workers and those who do not, and that the existing minimum salary levels (which were last updated in 2004) are outdated.
The department further asserts that the annualized equivalent of the standard salary level is currently below the 2015 poverty threshold for a family of four, making it inconsistent with Congress' intent to exempt only those employees who typically earn salaries well above those of workers they supervise and presumably enjoy other privileges of employment such as above-average fringe benefits, greater job security, and better opportunities for advancement. The department also raised the “highly compensated employee” (HCE) salary threshold to $134,004 per year.
An entirely unprecedented aspect to this new law is that the minimum salary levels are automatically updated into the future. Starting Jan. 1, 2020, the minimum salary levels will automatically update every three years. The standard salary minimums will automatically update based on the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region, and the HCE salary minimums will update based on the 90th percentile of earnings of full-time salaried workers nationwide. The DOL will publish a notice of the new updated thresholds in the Federal Register at least 150 days before those updated amounts take effect, and also publish these updated rates on the Wage and Hour Division's website.
Another notable change is that now nondiscretionary bonuses and incentive payments (including commissions) may be used to satisfy up to 10 percent of the minimum standard salary requirement if such payments are paid on a quarterly or more frequent basis. HCEs must receive at least the full standard salary amount each pay period on a salary basis without regard to the payment of nondiscretionary bonuses and incentive payments, but nondiscretionary bonuses and incentive payments (including commissions) will count toward the total annual HCE compensation requirement.
Moreover, if an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain their exempt status the employer may provide a "catch-up" payment at the end of the quarter to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 13-week period).
For purposes of this rule, nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees to induce them to work more efficiently or to remain with the employer, such as bonuses for meeting set production goals, retention bonuses and commission payments based on a fixed formula. In contrast, discretionary bonuses are those for which the decision to award the bonus and the payment amount are at the employer's sole discretion and not in accordance with any preannounced standards, such as an unannounced bonus or spontaneous reward for a specific act.
How Will the New Rules Affect AutoDealers?
The department estimates that about 4.2 million currently exempt employees would not meet the new proposed salary levels and would be entitled to overtime pay without some intervening action by employers, and that employers will experience total annualized cost increases of approximately $295 million per year over the first 10 years. Businesses that employ white collar exempt employees at salaries below the new threshold must reclassify those employees as nonexempt and monitor/pay overtime hours, or increase their pay to the new minimum salary.
Auto dealers should most closely evaluate their low-to-mid-salary level exempt positions such as assistant department managers, office/accounting/payroll managers, customer relations managers, business development center managers, administrative assistants, and lot/car wash/detail supervisors. Dealerships should also make sure that their commission-paid management employees (such as department managers) have pay plans that guarantee at least the salary threshold amount (either through a base salary or guaranteed minimum commissions) in order to preserve their exempt status.
Although the DOL contemplated possible changes to the duties criteria for these exemptions, it did not enact any such changes as part of these final rules. In any event, it is not uncommon for dealerships to label a position “manager” and assume that this label qualifies the position as exempt when the position would fail the duties test because the employee is not primarily engaged in exempt duties. Often, positions such as finance and insurance managers (primarily selling), business development center managers (primarily making appointment calls), customer relations managers (primarily customer follow-up), and car wash/detail supervisors (primarily cleaning cars) are misclassified in this manner. These misclassification errors could open up the dealership to substantial and costly overtime liability.
Employers will have to monitor the periodical adjustments to the threshold salary requirements and apply them every three years as necessary. For employers with workforces that are heavy in low-to-mid-management or administrative positions that are currently treated as exempt, the cost impact could be significant, with salary adjustments or new overtime pay obligations. Employers may also reduce other compensation and benefits to offset some of these increased costs. In cases where the state’s white collar exemption criteria differ from the federal, employers need to apply the standard that’s most beneficial to the employee.
Dealerships should begin assessing the impact of these changes by identifying any exempt employees who would not meet the new standards and evaluating the costs, feasibility and legality of possible adjustments. Employers are advised to watch for updated information and to consult with employment counsel to maintain compliance with applicable laws.