Labor Costs May Soar for Entrepreneurs

What exactly should you be telling the Department of Labor about its proposed "white collar" exemption changes?

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By Jonathan Segal

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Opinions expressed by Entrepreneur contributors are their own.

Entrepreneurs should be paying close attention to proposed federal changes to the "white collar" exemptions of the federal minimum wage and overtime law, otherwise known as the Fair Labor Standards Act (or FLSA).

Related: U.S. Labor Participation Rate at Lowest Level Since the 1970s

Changes that the Department of Labor (DOL) proposed earlier this month, if enacted, could cost entrepreneurs big.

To understand the proposals first requires understanding those five FLSA white collar exemptions. They are: executive (supervisory), learned/creative professional, administrative, outside sales and computer professional. Any employee who falls under one of these exemptions is ineligible for overtime. (An employee gets the benefit of federal, state or local law -- whichever is best for him or her. This article focuses on federal law only.)

To be exempt under one of the white collar exemptions, three requirements must be met (subject to certain exceptions):

  • Minimum salary: The current minimum salary is $455 per week. The DOL has proposed increasing the minimum salary to $970 per week. In addition, the DOL has proposed automatic annual increases in the minimum salary.
  • Salary basis: The employee must be paid on a salary, not hourly, basis. This means that limited deductions are permitted for absences, and no deductions may be made based on quantity or quality of work. No changes have been proposed to the salary basis.
  • Duty test: The employee's primary (principal, major or most important) duty must be exempt. Currently, this is qualitative. The DOL has not proposed any changes, yet, to the primary duty test. But it did ask a lot of questions, such as whether a quantitative test based on percentages (as in California) should be adopted; and whether the concurrent duty regulation (relative to executive exemption) should be eliminated.

Employers have until September 5, 2015, to submit comments. Employees will be weighing in so employers should, too. Here are five suggestions entrepreneurs might consider submitting to the DOL:

1. Minimum salary

The proposed minimum salary has more than doubled from the current one in the law. You don't need me to tell you that's that quite a jump. What you might not know is that some employee advocacy groups feel the number is too low. You can bet they will submit proposals suggesting a higher number.

Originally, the Obama administration had floated an annual salary of $42,000 as the minimum salary. Consideration should be given to asking the DOL to reduce the minimum number to this original and relatively more reasonable number.

2. Counting some bonuses toward the minimum salary

The DOL has asked whether some bonuses should count toward the minimum salary. For example, it raised the possibility that up to 10 percent of the minimum salary could be met by certain bonus payments, such as nondiscretionary bonuses.

Bonuses are an important part of many employees' total compensation. So, they should count toward the minimum salary, particularly with such a large spike in the minimum salary. The DOL needs to hear this from entrepreneurs.

Related: Lawmakers Question Legality of NLRB's Joint Employer Decision

3. Automatic increases

The DOL has proposed automatic annual increases to the minimum salary, to prevent erosion going forward. To be fair, the value of the $455 per week adopted in 2004 is relatively low today. Yet while the DOL proposal sounds reasonable, it assumes a level of certainty that does not exist. We don't know what the future will bring. What if there has been an automatic increase since the height of the Great Recession in 2009?

Recognize the legitimate concern, but propose an alternative. Consider proposing increases every four years or so.

4. Primary duty

As noted above, the federal test for primary duty is currently more qualitative than quantitative.The DOL has asked whether it should switch to a quantitative approach, such as is the case in California, where an employee can meet the primary duty test only if he or she spends more than 50 percent of his or her time on exempt duties.

But that's harder than it sounds: It's difficult, after all, to estimate exact percentages. Plus, they may vary from week to week. That is why exempt positions are so often attacked in California. Spreading the California requirement to all states may mean that employers will need to reserve money for litigation, with a corresponding drop in employee compensation and benefits.

Be careful not to raise this as a threat. Just explain the reality that there is only so much money to go around, and that the more of it that goes to lawyers, the less there may be for the employees.

5. Concurrent duties

The current DOL regulation for executives (supervisor and above) recognizes that these individuals often do exempt and nonexempt work at the same time. This is particularly true in retail and hospitality. For example, in retail stores, managers often supervise employees and stock shelves or perform other more menial tasks at the same time. This currently can count as exempt work toward the (qualitative) primary duty.

The DOL has asked whether the concurrent duty regulation for exempt employees should be eliminated. The DOL needs to hear from as many businesses as possible: no.

If the concurrent duty test is abolished, there may be smaller stores, for example, with no exempt supervisors. This result becomes even more likely if the California approach is adopted. Supervisors can walk and chew gum at the same time. For the same reason, the concurrent duty exemption must remain.

These are only five of many potential recommendations. Here's a link to more information about the full proposed rule.

You may submit comments to the DOL on your own or through an industry association. Don't remain silent! It's now that your collective voices could make a difference. Remember, the deadline is this coming September 5.

Related: California Ruling Seen Unlikely to Dent Value of Uber, Other Startups

Jonathan Segal

Partner in Employment Practice Group of Duane Morris

Jonathan A. Segal is a partner in the employment practice group of Duane Morris LLP in Philadelphia and principal at the Duane Morris Institute, an educational organization.

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