cathy-300pxMeet Cathy, the Cooperative Development Institute’s new answerwoman! She can take on any co-op questions you might have, big or small. Today we address the question: “How do the new overtime rules the Obama administration has planned affect cooperatives?” See all of Cathy’s answers and ask your own on her home page. This blog post was written by Heather Wright, attorney at WrightJones PLC.

Compensation for co-op leaders has always involved a balance between the financial constraints of running a business on a thin profit margin, and acknowledging the hard work and long hours that a management role demands. Indeed, many co-op leaders have, at one time or another, done the math and realized that their salary, when converted to an hourly wage, works out lower than some of the employees reporting to that leader. New regulatory changes are about to add new considerations to these compensation discussions.

The FLSA & Its Exemptions

As a starting point, the Fair Labor Standards Act (“FLSA”) is the federal law that guides most wage issues. Among other requirements, the FLSA requires employers to pay overtime for any hours worked by an employee in excess of 40 in a workweek, to retain accurate time records of all hours worked, and to pay at least a minimum wage.

Employees are generally presumed to be covered by the FLSA, and are therefore referred to as “non-exempt” employees – they are not exempt from the FLSA requirements. The law recognizes, however, that the reality of the employment relationship requires making certain exemptions for particular types of work. If an employee qualifies for an exemption, the employer may pay the employee a salary for all hours worked within a work week and need not comply with other FLSA requirements, such as tracking hours worked or compensating the exempt employee for hours worked in excess of 40 in a workweek.

The most common exemptions seen in the co-op world include the so-called “Executive,” “Administrative,” or “Professional” exemptions. To qualify for one of these exemptions, the employee must meet two tests – a “primary duties” test and a “salary” test. The “primary duties” test refers to the type of work the employee performs. The required duties vary depending on the exemption, and can involve a rather intricate legal analysis to ensure FLSA compliance. While meeting the “primary duties” test is a critical part of ensuring FLSA compliance, it is a recent Department of Labor regulatory change to the second test, the “salary” test, that is causing quite a stir as of late.

The salary test states that an exempt employee must earn a weekly salary that is at least an amount set by regulation. Since 2004, the salary test regulation has been $455 per week (or approximately $23,660 annually). This test had not been revisited in over a decade, and therefore inflation had diluted the intended impact of the salary test.

2016 Regulatory Updates to the Salary Test

This year, the Department of Labor announced new salary rules. Under the new rules, the salary test will be revisited every three years and will be determined by examining the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, which is currently the South. As a result, on December 1, 2016, the salary test will more than double, to $913 per week (approximately $47,476 annually). The increase in the salary test means that, regardless of the primary duties performed by an employee, if the employee does not earn at least $913 per week, the employee does not qualify for exemption from FLSA requirements, and therefore must be treated as a non-exempt employee.

Impact of Regulatory Changes on Co-ops

For employers that run on a tight budget or minimal profit margin (including, frequently, co-ops), many leadership employees may earn less than the amount required by the salary test. This creates a scenario where co-op leadership may either need a pay increase to match or exceed the salary test, or to be moved into non-exempt status. By December 1, co-ops will need to plan for compliance with the new FLSA regulations, which may involve the following:

  • Determine the impact. Assess the number of individuals currently impacted by the increase in the salary test. You may find that you have some managers above the salary line and some below, which will also need to be addressed.
  • Estimate the cost of additional overtime. Since leadership personnel usually work in excess of 40 hours weekly, examine the potential cost of paying an overtime rate for that work. If you must convert a role into a non-exempt position, you may want to budget for a set amount of overtime weekly.
  • Examine alternatives. Should you choose to not allow overtime, examine areas of work traditionally performed by leaders and evaluate if some duties can be delegated to others within the organization who have not otherwise received the opportunity to practice leadership skills. Empower potential leaders with smaller managerial tasks that will develop skills, while being mindful that any increase in workload will need to be offset by reorganizing that employee’s current duties or compensating the employee for absorbing the additional workload.
  • Review the use of exemptions within the organization. While the primary duties tests did not change, this is a great opportunity to audit your compliance in this area. Just because a role has traditionally been considered exempt does not mean it is properly classified.
  • Think strategically. While raising an employee’s salary to meet the salary test might be the option that makes sense in some situations, it should not be the default approach. Since the new regulations require the DOL to revisit the salary level every three years, an automatic increase may serve as a temporary patch which never actually solves a problem and only creates wage compression later.
  • Be mindful of the emotional impact. While logic would tell us that employees should be excited about becoming non-exempt due to overtime compensation and 40-hour work weeks, the reality is that switching to a non-exempt status can feel like a demotion, as though the employee’s contributions are somehow less valued. Be mindful of how this change may impact an employee’s perceived self-worth.

With a thoughtful approach, co-ops should be able to maintain the balance inherent in leadership compensation while maintaining co-op values and regulatory compliance.

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