United States: DOL Overtime Proposals—Part II: Salary Change Consequences And "Discretionary" Bonus Clarification

Double-Barreled Rulemaking. Last month, we commented on the Department of Labor's (DOL) March 7, 2019, proposed rulemaking to increase the salary test threshold for overtime exemptions, potentially making another million or so people eligible for overtime pay. Next, in a companion rulemaking proposal, issued March 28, 2019, and summarized in our post last week, the DOL announced that it seeks to clarify how the "regular rate" is calculated for the purpose of calculating overtime.

Now What? Whether and when the new salary change will take effect is unknown—but it could be later this year, barring litigation delays such as we saw with the Obama administration's attempt to effect similar changes. Applying the same calendar math, the regular rate changes could take effect later this year or in early 2020. Either way, it would be worthwhile for HR professionals to think ahead.

Salary Changes

The Choice. Many employers already adjusted in advance for what they thought would be more onerous Obama-era changes in 2016. For those who haven't: For exempt employees making less than the proposed new threshold of $35,308 per year (subject to periodic review and changes), the change would present a choice between pay increases or reclassifying employees as nonexempt overtime workers. Considerations:

  • Audit-Adjusting. For employees of questionable exempt status, this will present an opportunity to self-audit, update internal review of FLSA compliance, and reclassify them as nonexempt. Increasing salary to meet the exemption may be best for people who are close to the new threshold anyway and who work a lot of overtime hours.
  • Unexpected Applications. Where salaried employees would move to overtime status, remote work via Citrix, emails and the like has to be reviewed—and clocked. In more liberal venues such as California, state rules that do not apply to salaried exempt folks will kick in, such as mandatory break rules.

Equivalent Options for Nonexempt. Salaried employees who are no longer exempt may present morale problems from the change to hourly worker status. There are lawful options for cushioning the blow. For example:

  • Salaried with Overtime. Protect "salaried" work status by keeping the employee's pay on a salary basis (at the same rate) while punching the clock to track and calculate overtime. Employees with fairly fixed hours and relatively little overtime may be well-suited for this option.
  • Hourly with Overtime. Emphasize the benefits of overtime in converting the employee to an hourly rate, using an hourly rate that equates to his or her salary. Employees who regularly work overtime, but who are not close in pay to the new salary threshold may be best suited for this option.
  • Fluctuating Workweek and Fixed Workweek Options. For employees who will stay on a salaried basis but receive overtime, there are further options available for reducing the amount of overtime paid, in the form of fluctuating workweek or fixed workweek pay. These are potentially clever options but must be handled with care and need separate treatment.

Either way. Bear in mind: For salaried overtime workers, the special rules limiting the employer's ability to dock the pay of exempt salaried workers would no longer apply. And employers will want to try and avoid the unintended consequence of hourly subordinates making more than their salaried nonexempt supervisors.

Regular Rate Changes

The Exclusions. Turning to the regular rate changes, the calculation of the baseline hourly rate for overtime purposes, termed the "regular rate" in wage and hour law, is based on all compensation received for employment, subject to the exclusions stated in the wage and hour statute—Section 7(e) of the Fair Labor Standards Act—or the FLSA.

Discretionary Bonuses. For the proposed regular rate changes in play, of primary concern on the change list: Discretionary Bonuses.

  • Need for Clarity. Even before the changes, "discretionary" bonuses did not count toward the regular rate. 29 C.F.R. §§ 778.208-211. But employers and courts often agonize over what "discretionary" means. The DOL wants to clarify it, with examples of discretionary bonuses that are excludable.
  • Employer Friendly? The proposed changes would try to add some guidance, if not necessarily greater clarity, for example, by stating that neither the "discretionary" label nor the reason for the payment are conclusive of whether a bonus is discretionary. The DOL would argue that this boundary can actually favor employers:

"While attendance, work quality, and longevity bonuses, as those terms are commonly used, are usually paid pursuant to a prior contract, agreement, or promise causing the employee to expect such payments regularly, and therefore are non-discretionary bonuses that must be included in the regular rate, there may be instances when a bonus that is labeled as one of these types of bonuses is not in fact promised in advance and instead the employer retains discretion as to the fact and amount of the bonus until at or near the end of the period to which the bonus corresponds."

Official Examples. If adopted, the regulations would add specific examples of bonuses that may be considered discretionary (adding to those already in the regs that are not discretionary), such as employee-of-the-month bonuses, bonuses for unique or extraordinary efforts with no pre-established criteria, severance bonuses, bonuses for overcoming difficult challenges, and the like—where "the fact and amount of payment is in the sole discretion of the employer until at or near the end of the periods to which the bonuses correspond and that are not paid "pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly."

  • Audit-Adjusting. While we wait for actual implementation, as we have discussed before, self-auditing is a highly cost-effective way to stay in compliance and identify where the coming changes would be of best strategic use.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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