Hot Topics in Employee Compensation: Pay Right Now

or Pay More Later

What We’ll Cover

►The Department of Labor’s (“DOL”) new minimum salary regulations:

FLSA OverviewOvertime Pay RequirementsThe New Rule on Minimum Salary RateThe Impact of the New RuleWhat Should Employers Do?Administrative, Executive, Professional and Computer Employee ExemptionsHighly Compensated Employee Exemption

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What We’ll Cover

►The Office of Federal Contract Compliance Programs’ (“OFCCP”):

Final pay transparency ruleUpdated sex discrimination guidelines

►Equal Employment Opportunity Commission’s (“EEOC”) systemic discrimination focus, including revisions to EEO-1

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FLSA Overview

►The FLSA generally requires employers to pay non-exempt employees at least the minimum wage (currently $7.25 per hour) for all hours worked, overtime compensation for all hours worked over 40 per workweek for non-exempt employees, and to accurately track the number of hours that non-exempt employees work

►Employees are presumed non-exempt, and the burden to prove an employee is exempt falls on the employer

►To be exempt, an employee must satisfy all the requirements of at least one exemption

►Common exemptions for employees include the administrative, executive and professional exemptions

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FLSA Overview: Damages

►Under the FLSA, a plaintiff may recover back pay, liquidated damages (an amount equal to the back pay), attorneys’ fees, and litigation costs

►The statute of limitations is two years for ordinary violations and three years for “willful” violations

►Simply paying a salary, or a salary plus extra compensation for “extra” hours, does not satisfy the obligation to track hours worked and pay overtime compensation for all hours worked over 40 per workweek

►The employer must calculate the employee’s regular rate and pay the employee 1.5 times the regular rate for each overtime hour

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Overview of Overtime Pay Requirements

►A non-exempt employee covered by the FLSA must receive overtime compensation for hours worked in excess of 40 in a workweek at a rate (with very limited exception) not less than 1.5 times the employee’s “regular rate” for that workweek

►The regular rate cannot be less than the minimum wage►An employee’s regular rate includes all pay for work except certain

payments that may be excluded, such as premium payments for work on Saturdays, Sundays and holidays, vacation or sick pay, and purely discretionary bonuses

►An employee’s workweek is a fixed and regularly recurring period of 168 hours (7 consecutive 24-hour periods)

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The Final New Minimum Salary Rule

►Issued May 18, 2016Effective December 1, 2016Includes hundreds of pages of commentary

►Increases the minimum salary from $455 per week ($23,660 per year) to $913 per week ($47,476 per year)

40th percentile of full-time salaries in the lowest-wage Census region (the South)

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The Final New Minimum Salary Rule

►Increases the minimum total annual compensation amount for highly compensated employees from $100,000 to $134,004, which includes at least $913 per week paid on a salary basis

►Minimum salary amounts will be updated every three years, beginning January 1, 2020

►Up to 10% of the minimum salary amount can be satisfied by payment of non-discretionary bonuses or incentive payments on a quarterly or more frequent basis

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Non-Discretionary Bonuses or Incentive Payments

►Up to 10% of the minimum salary amount can be satisfied by payment of non-discretionary bonuses

►Promised bonuses such as those announced to employees to induce them to work more efficiently or to remain with the employer are considered non-discretionary

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Non-Discretionary Bonuses or Incentive Payments

►If an exempt employee does not earn enough in non-discretionary bonuses or incentive payments in a quarter, then the employer has one pay period to make a “catch-up” payment at the end of the quarter or the employee becomes eligible for overtime for that quarter

►No “catch-up” payments are permitted under the highly compensated employee exemption

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The Final New Minimum Salary Rule (Cont’d)

►No changes to any of the duties tests (yet)No adoption of a “50% rule” (like the requirement under California law)

►No changes to the outsides sales employee exemption►Note that for computer exemption the new rule will not affect

employees who are paid by the hour at $27.63 per hour or more, but will affect exempt computer employees paid on a salary basis who will be subject to the new $913 per week salary minimum

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Other Key Issues

►No proration for part-time employees►Non-profit organizations are not exempt from the minimum salary►Understanding all of the implications of reclassification to non-exempt

Off-the-clock workOn-call timeTravel timeTelecommutingMeal and rest breaksTime recording

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What Should Employers Do?

►Analyze positions classified as exempt for accuracy►Review job descriptions, and update as needed► Identify current exempt positions that pay less than the new minimum

weekly salary and decide what to doDevelop a communication and implementation planDetermine whether any policies should be revisedTrain managers who do not have (recent) experience managing non-exempt employees and overtime issues (e.g., off-the-clock, on-call, travel and telecommuting time)Train newly-classified non-exempt employees with respect to time recording, taking meal and rest breaks, etc.

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What Should Employers Do?

►Several optionsIncrease the employee’s salary to meet or exceed the new minimumReclassify the employee as non-exempt and continue to pay the employee on a salary basis

► Understand overtime pay obligations► Reduce hours to eliminate overtime pay exposure► “Fluctuating workweek/half-time plan" option of salaried non-exempt to

save on overtime, provided certain criteria are metReclassify the employee as non-exempt and start paying hourly wages plus overtime

►Many resources on the DOL’s website: https://www.dol.gov/whd/overtime/final2016/

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Administrative Exemption

►Must receive at least $455 per week on a salary or fee basis;Special exception for certain academic advisors in educational institutions

►Primary duty must be the performance of office or non-manual work directly related to management or general business operations; and

►Primary duty must require the use of discretion and independent judgment with respect to matters of significance.

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Executive Exemption

►Must receive at least $455 per week on a salary or fee basis;►Primary duty must be managing the enterprise, or managing a

customarily recognized department or subdivision of the enterprise;►Must customarily and regularly direct the work of at least two or more

other full-time employees or their equivalent; and►Must have the authority to hire or fire other employees, or the

employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

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Professional Exemption

►Must receive at least $455 per week on a salary or fee basis; ►Does not apply to doctors, lawyers or teachers►Primary duty must be the performance of work requiring advanced

knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

►Advanced knowledge must be in a field of science or learning; and►Advanced knowledge must be customarily acquired by a prolonged

course of specialized intellectual instruction.

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Highly Compensated Employee Exemption

►Must be paid total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis;

May consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits

►Primary duty includes performing office or non-manual work; and►Customarily and regularly performs at least one of the exempt duties

or responsibilities of an exempt executive, administrative or professional employee.

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Key Takeaways…

► The new minimum salary rule – $913 per week – becomes effective December 1, 2016

► The minimum total annual compensation for highly compensated employees is also increasing (from $100,000 to $134,004)

► Paying up to 10% in non-discretionary bonuses to satisfy the new minimum salary may be helpful, but employers must be careful

► The new rule does not change any of the duties tests

► Analyze exempt positions and confirm they satisfy both the duties and new minimum salary requirements

► Consider the options and make decisions well before December 1, 2016

► Develop a communication and implementation plan for any positions that will be reclassified as non-exempt

► Develop appropriate training for managers19

Background On The OFCCP

►Part of the DOL, with mission of “enforc[ing], . . . the contractual promise of affirmative action and equal employment opportunity required of those who do business with the Federal government.”

►Broad authority in prohibiting discrimination on account of race, color, religion, sex, sexual orientation, gender identity, national origin, disability, and protected veteran status

►Jurisdiction over federal contractors and subcontractors

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OFCCP’s Pay Transparency Rule

►Applies to federal contractors/subcontractors who enter into federal contracts or subcontracts (or who modify existing contracts or subcontracts) on or after January 11, 2016

►Covered federal contractors or subcontractors include those:Holding federal contracts or subcontracts with a combined total > $10,000 in any 12-month (rolling) period;Holding a single federal contract, subcontract, or federally assisted construction contract in excess of $10,000;Holding government bills of lading, serving as a federal funds depository, or serving as an issuing/paying agency for U.S. savings bonds and notes in any amount

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OFCCP’s Pay Transparency Rule – Prohibitions

►Prohibits covered contractors (“CCs”) from:Discharging or discriminating against employees or applicants due to their inquiries about, discussions, or disclosures of their owncompensation or compensation of another employee or applicantHaving policies prohibiting or tending to restrict employees or applicants from discussing or disclosing their compensation or the compensation of others

►Two general defenses under the Rule:Disclosure of compensation information obtained by certain employees through essential job functions not protected, with limited exceptionsCCs can raise general defense based on consistent and uniform enforcement of “workplace rule” that does not prohibit discussion of compensation information

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OFCCP’s Pay Transparency Rule – Additional Obligations ►Contract Modifications

CCs must use revised Equal Opportunity clause in new/modified contracts (which now includes provision prohibiting contractors from discharging, or in any manner discriminating against, any employee or applicant because he/she inquired about, discussed, or disclosed his/her compensation or compensation of another employee or applicant)CCs may continue to incorporate EO clause by reference

►Handbook UpdatesCCs must incorporate OFCCP’s specific non-discrimination language into existing employee manuals or handbooks

►PostingsCCs must disseminate same specific non-discrimination language either electronically or via hard-copy posting (note: this is in addition to obligation to post “EEO Is The Law” poster)

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OFCCP’s Updated Sex Discrimination Guidelines

►August 15, 2016: Final Rule goes into effect►Guidelines update Executive Order 11246’s implementing

regulations, which (already) prohibit sex discrimination in employment, and apply to any and all CCs subject to the Executive Order

►According to OFCCP….Prior guidelines were “out of touch with current law and with the realities of today’s workforce and workplaces.”

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OFCCP’s Updated Sex Discrimination Guidelines –Noteworthy Changes

►Guidelines broadly address numerous employment issues/areas, including: sex as a BFOQ; compensation and benefits; pregnancy, childbirth, and related medical conditions; caregiving; sex stereotyping; job “steering”; harassment and hostile work environment

►Some noteworthy changes:Transgender protectionsRequirements for accommodating pregnancy, childbirth, and related medical conditions provisions

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OFCCP’s Updated Sex Discrimination Guidelines –Takeaways

►Although OFCCP says its changes are simply consistent with current law, CCs should carefully analyze new compliance requirements when:

Revising key policies (such as EEO, Anti-Harassment, Leave and Accommodation);Training supervisors and managers;Reviewing hiring and recruitment practices; andReviewing benefits plan and coverages

►Consider implementation of OFCCP’s “best practices,” where possible►Think through who is a “similarly situated” employee

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EEOC Focus on Compensation Issues►One of EEOC’s strategic enforcement priorities for 2013 – 2016 is

“enforcing equal pay laws” with “target [of] compensation systems and practices that discriminate based on gender”

Encouraged use of directed investigations and Commissioner Charges to facilitate enforcement

► In 2015, EEOC investigated 268 systemic pay discrimination claims, with 36 percent resulting in probable cause determination (compared to less than 5% of all charges filed with the EEOC)

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EEOC Focus on Compensation Issues

►In January 2016, EEOC and DOL announced significantrevisions to EEO-1 Form, requiring employers to add summary pay data by job category to annual disclosure

Revised EEO-1 would collect data on employees’ total W-2 earnings and hours workedCommission anticipates providing aggregate information to employers (with aspiration of impacting pay decisions) and publishing various reports analyzing collective data

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EEOC Focus on Compensation Issues

►In July 2016, EEOC published final proposal with second round of public comment. Importantly, the EEOC:

Delayed implementation of first reporting obligation to March 31, 2018 Specified that employers should use Form W-2, Box 1, as measure of pay for new component of EEO-1 (this will include supplemental pay)Defined “hours worked” according to FLSA, requiring employers to report hours worked by exempt employees

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EEOC Focus on Compensation Issues - Takeaways

►Employers should: Watch for publication of final rule (anticipated by end of 2016)Consider whether and how current systems can comply with proposed requirementsProactively identify risk areas, keeping in mind that 2017 pay data will be first year of reported data (assuming first reporting date of March 31, 2018)

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