By Steven GreeneThe U.S. Department of Labor is expected to publish final regulations early this summer that will significantly increase the number of employees in the banking industry that must be paid overtime. The final rule is expected to more than double the salary level required for an employee to be eligible for an exemption from overtime—from the current $23,660 per year to approximately $50,440. As a result, many banks will face difficult operational challenges assessing the need to reclassify employees as well as potentially negative employee reactions. Moreover, DOL is likely to provide only 60 to 90 days for compliance with the final rule, a woefully inadequate timeframe. Therefore, banks may want to begin now to prepare for the final rule.
An immodest proposal
These dramatic changes to the overtime rules, made at the direction of President Obama, are expected to more than double the salary level required to be considered for the executive, administrative, professional and computer overtime exemptions. Each of those exemption tests include a compensation component and a duties component, both of which must be satisfied for an employee to be exempt from overtime. By substantially increasing the salary level required for exempt status, the proposal could trigger a broad reclassification of employees from exempt to nonexempt status.
ABA provided detailed comments on the serious and adverse impact of the proposal on the banking industry and its employees—and for community banks in particular. For example, ABA strongly challenged the proposed nationwide salary standard as being fundamentally unfair and inaccurate, given the widely divergent costs of living across the country and the attendant differences in compensation levels. ABA highlighted the negative impact on employee morale from the loss of status that many exempt workers enjoy, as well as the loss of flexibility and the impact on family life. ABA also highlighted the banking industry’s historical practice of offering far more generous incentives and employee benefits than other industries. Because the proposal would consider only base salary, the banking industry would be punished for that generous benefit philosophy.
While the proposal has been widely criticized by the business community, statements from the Obama administration clearly suggest that they reject those concerns and arguments. Thus, it appears likely that the final rule will closely mirror the proposed rule with a $50,440 annual salary level and a 60-to-90-day implementation period.
Actions to consider now
As an initial step, a bank should review existing exempt employee compensation and determine which individuals are paid less than the new targeted figure. The bank can then consider whether an increase in salary to the new level would be feasible and appropriate. In making this determination, the bank may consider the amount of overtime work performed by various employees or in job categories. It may be advisable to provide salary increases in lieu of incurring anticipated overtime costs.
However, many banks may find that increasing salaries to the $50,440 target for large populations of employees is simply not a practical option. Providing salary increases to meet the new standard can be itself problematic. From a compensation and management perspective, a dramatic increase in compensation may not be consistent with local costs of living, and may run the risk of creating salary compression issues with other roles within the organization.
Converting individuals to nonexempt status will frequently create employee relations challenges. In many cases, the affected employees have been classified as exempt for many years and will view the change in exempt status as exactly that—a change in status. For these reasons, banks must carefully consider how to communicate these changes and how to implement them.
Additionally, the salary level change may create situations in which some employees with a given title will be exempt, while others with the same title will be nonexempt. Banks are finding that they have branch managers paid between $40,000 and $60,000 per year, depending upon the employee’s experience, the location of the branch and the size of the branch. The new salary threshold will result in some of those employees retaining exempt status, while those paid under the minimum will not. In many cases, increasing the salary level to the standard is simply not appropriate. However, many banks find that the concept of having exempt and nonexempt employees in the same job title troubling.
The change will also affect roles like commercial lenders and investment advisers where the employees receive a modest base salary but participate in attractive incentive or bonus plans. Currently, these roles need to receive a base salary of at least $455 per week to be eligible for exempt status. Once the final rule is effective, that base salary will need to be dramatically increased to the new threshold (approximately $970 per week). For those roles where the bank is relying upon the administrative or executive exemptions, banks are reviewing their incentive plans to move more compensation to the guaranteed salary to satisfy the new standard. That adjustment is necessary to retain the exemption from paying overtime.
Community banks are also examining whether exempt classified employees paid more than $50,440 do indeed satisfy the duties test for the executive, administrative, professional, or computer professional exemptions. This evaluation may be prudent for a variety of reasons. First, the duties tests have very stringent requirements, and banks are finding that some exempt employees do not perform the responsibilities required to satisfy the duties test element for the overtime exemption. This can be caused by a variety of factors such as new incumbent employees, business reorganizations or simply modified job content.
Minimizing disruption by planning ahead
Converting an employee from exempt to nonexempt status is never easy. However, when these new overtime exemption regulations are implemented, some reclassifications will be necessitated in almost every organization. By addressing individuals or positions that no longer satisfy the duties test when implementing the final rule and making all adjustments necessary to maintain strict Fair Labor Standards Act compliance at the same time, community banks may minimize disruption and provocation. Banks will be able to explain the timing for the reclassification as consistent with other reclassifications called for by the new federal regulations.
When confirming exempt status, particular attention should be paid to the outside sales exemption. This exemption does not require a minimum salary payment, so the scope of the exemption is not affected by the new regulations. The exemption has been used in the banking industry particularly for mortgage lenders, commercial lenders and investment advisers. Over the past five or six years, guidance from DOL and federal courts on with regard to that exemption has been actually quite employer-friendly.
Steven Greene, an expert in wage and hour law who focuses his practice on community banks, is managing partner at Matthews and Greene.