The Fair Labor Standards Act (FLSA) establishes minimum wage and overtime pay standards affecting employees in the private sector and in federal, state and local governments. It provides an exemption from both its minimum wage and overtime pay provisions for individuals employed as bona fide executive, administrative and professional employees. As a general rule, these exemptions currently require an employee be paid a minimum of $455 per week, or $23,660 per year, as a threshold requirement for application of the exemption (although certain states, such as California, have higher minimum pay thresholds for their exemptions to apply). These minimum salary requirements were last increased in 2004.
On July 6, 2015, the United States Department of Labor, Wage and Hour Division (DOL), published proposed regulations that would drastically increase the minimum salary that must be paid to exempt employees under federal law to $50,440 or more. For club employees who are currently exempt and earning less than $50,440 per year, the proposed regulations would effectively require clubs to raise salaries to meet this threshold, or re-classify the employees as nonexempt and compensate them for all overtime hours worked. Under either scenario, most clubs are likely to feel an impact, whether in the form of an increase in payroll or the dissatisfaction of employees whom clubs can no longer afford to classify and compensate as exempt.
The $50,440 salary threshold is, unfortunately, just the starting point. The proposed regulations would actually require employees subject to the executive, administrative and professional exemptions be compensated at a minimum salary level based on the 40th percentile of weekly earnings for full-time workers, as based on Bureau of Labor Statistics data. Although DOL projects the 40th percentile weekly earnings for the first quarter of 2016 will be $970—or $50,440 annually—that number will only go up. In fact, DOL has estimated that 40th percentile weekly earnings will increase by two percent between the first quarter of 2015 and the first quarter of 2016. Assuming similar growth in ensuing years, 40th percentile weekly earnings are likely to increase by more than $1,000 per year for the foreseeable future. And because the proposed regulations would require that the minimum salary levels for the exemptions be automatically updated on an annual basis, clubs can expect to immediately feel the impact of any increase in 40th percentile weekly earnings. As earnings increase on a national level, so too will the required minimum salary for exemptions.
The Duties Test
But DOL did not stop there. In addition to proposing the substantial salary increase for the executive, administrative and professional exemptions, DOL also requested public comment on the “duties tests” for those exemptions. Each exemption contains duties elements in addition to the minimum salary thresholds. For example, the executive exemption requires that the employee’s primary duty be the management of a department or subdivision, while the administrative exemption requires that the employee’s primary duty be the performance of office or nonmanual work directly related to the general business operations. DOL has suggested that changes to the duties tests may be necessary in order to ensure that the tests “fully reflect the purpose of the exemption.” In other words, DOL is concerned that employers are wrongfully classifying exempt employees.
Although the proposed regulations themselves do not contain any changes to the duties tests applicable to each exemption, DOL expressed concern that the current duties tests may promote improper exemption of employees performing a disproportionate amount of nonexempt work. Accordingly, DOL requested public comment as to whether it should modify the standard duties tests applicable to the exemptions.
DOL made clear that the goals of this proposal include ensuring “that the FLSA’s intended overtime protections are fully implemented,” and “setting a salary threshold that adequately distinguishes between employees who may meet the duties requirements of the [exemptions] and those who likely do not.” In other words, DOL seeks to reduce the number of employees classified as exempt and increase the number of employees covered by the FLSA’s overtime protections. By drastically increasing the minimum salary required for an exemption to apply, it is likely the new regulations will do just that.
Challenges to Clubs
Unfortunately, DOL’s proposed regulations fail to account for a number of business realities. To begin with, DOL’s proposed increase to the minimum salary thresholds fails to account for differences in the cost of living among different states and geographic regions. That is, the minimum salary thresholds proposed would apply equally to each and every state, regardless of whether the cost of living and conducting business is high (such as in Hawaii and California) or low (such as in Idaho and Indiana). Not only does a worker’s spending power go further in a state with a lower cost of living, but employers are more limited in what they can charge for their products and services in such states. Whereas a club in California may be able to charge its patrons the rates necessary to compensate exempt employees at an annual salary of $50,440 or more, a club in Idaho may be unable to do so. This may be particularly true in states where clubs operate only seasonally. As such, clubs in states with a lower cost of living may have a more difficult time compensating employees at the level required for an exemption. In addition, DOL’s proposed increase to the minimum salary threshold is substantial and sudden, providing little time for employers to implement personnel changes in a minimally burdensome manner. Employers facing substantial payroll increases may be forced to take drastic action, such as laying off certain employees and/ or re-classifying others as nonexempt. Employees who currently enjoy the work stability and earnings consistency their exempt status provides may find themselves working less stable schedules and making less consistent earnings as a (re-classified) nonexempt employee.
Further, should DOL adopt changes to the duties tests, clubs may be forced to track the amount of time exempt employees spend performing various duties each and every day. Time and resources that could be spent performing the actual work of the job may instead need to be devoted to tracking and quantifying the specific tasks performed and the amount of time spent performing each task. This could prove both costly and burdensome.
Similarly, exempt employees will have to spend less time performing “nonexempt duties” so as not to lose their exempt status. A club restaurant manager, for example, may have to think twice before grabbing a water pitcher and walking around the restaurant to fill up patrons’ water glasses, as too much time spent performing such a nonexempt duty could result in the loss of the exemption. Other services would also be affected. Pro shop managers may find themselves unable to help patrons looking to buy equipment or apparel, while groundskeeper managers may find themselves prohibited from performing any of the manual work required of a groundskeeper. Overall club service could therefore suffer.
DOL’s proposed amendments to the FLSA regulations are not final. The Administrative Procedure Act’s rulemaking process provides for a public comment period on proposed amendments. Once the comment period of 60 days is over, a final draft of the regulations will be drafted, then reviewed and published. This final review process typically runs no more than 90 days. Thus, the final rule is not expected to be published until late in the year, with an effective date expected to be sometime in 2016. In the meantime, clubs should re-evaluate their relationships with their exempt employees in an effort to prepare for eventual changes to the regulations. Clubs should recognize that the proposed regulations are part of a broader effort to revamp federal labor and employment standards and should anticipate greater DOL scrutiny over their labor practices going forward.
Thomas Lenz is a partner at Atkinson, Andelson, Loya, Ruud & Romo where he heads the firm’s traditional labor practice, working with employers in all major industries across California and the West. He is an NCA director and serves on the Government Relations Committee. He can be reached at [email protected] or 562.653.3200. Philip J. Azzara is an associate with the firm.