Law firms are not unacquainted with changes to federal labor laws. In August 2004, the Department of Labor changed the Fair Labor Standards Act (FLSA) by revising its “white collar” exemptions and confirmed the classification of paralegals as non-exempt. This meant many paralegals who were working 40+ hours and not being compensated were to start getting paid overtime for working more than 40 hours per week. As it was then, the reaction to the newest changes to the FLSA are mixed between law firm employers and their employees. However, the major difference is that it is not just paralegals who are affected by this new change. Many other employees are being affected, with a potentially adverse financial impact on their employers.
As I do today, back in 2004 I worked closely with legal staff associations and law firm owners. Many were happy about the changes, others were outraged, and worse yet, others feared for their jobs. These newest changes are also causing angst, but the lines between employers and employees are much cleaner this time around. These new rules don’t change as much as most people think.
The facts vs. what most people think.
The new DOL FLSA requirements do not change the process for determining if someone should be classified as an exempt or non-exempt employee, and this is where many law firms make their first mistake. Many do not apply the “tests” and just assume their staff are exempt. The FLSA has three “tests” to determine if someone can be considered exempt. They are:
- The “salaries basis test”: is the person paid a fixed salary that does not change due to the quality or quantity of the person’s work.
- The “salary level test”: is the person paid $913/week or $47,476 annually (previously this was $455/week or $23,660 annually). Note that this is the test that will change on 12/1/2016.
- The “duties test”: does the person perform executive, administrative or professional duties (EAP duties) as defined in the DOL’s regulations.
Worth noting is that the DOL FLSA documents explicitly state that attorneys (and according to the FLSA changes in 2004 in 541.301(e)(7), more recently certain paralegal or legal administration staff “who possess advanced specialized degrees in other professional fields and apply advanced knowledge in that field in the performance of their duties”) typically are affected by tests 1 and 2.
The real truth.
If a person does not (or did not) meet all three of these tests, they have always (or should have) been classified as non-exempt and been paid overtime.
Rules that also changed are:
- The exemption for Highly Compensated Employees (HCE) who earn a total annual compensation of $134,004 was changed from $100,00 annually. Someone with annual earnings above this number will typically be categorized as overtime exempt.
- Employers can attribute up to 10% of non-discretionary pay towards the “salary level test” of a non-HCE but these payments must be paid no less than quarterly.
- The “salary level test” and HCE salary level exemption will be automatically updated every 3 years.
Two sides of the same coin.
Some law firm partners and others responsible for labor costs probably don’t enjoy yet another regulation telling them how and what they should pay their employees. However, it’s been this way for years. One the other side of that same coin, you have the employees of many law firms who are happy for the pay increase that comes with overtime. As with most decisions, whether imposed or agreed upon, one side isn’t going to be happy.
However, employers do have options on how they can handle the changes. The DOL expects employers to do one or more of the following:
- Give employees who are close the new exempt salary level and who meet the other “tests” pay increases to avoid paying overtime pay
- Pay the employees overtime
- Reduce or eliminate overtime hours
- Reduce base salaries and pay overtime when applicable, thereby accounting for the expected increase in pay to the employee in an effort to maintain salary close to the employee’s original pay.
Two of the options tangibly benefit the employee, and the other benefits the employer; at least that’s how it is perceived by both parties. The real benefit will typically be somewhere in between.
What is the fallout?
The DOL published facts regarding the overall financial impact to US businesses and workers:
1. For employees, it is estimated that 4.2 million white collar workers will either:
a. Have fewer work hours.
b. Start to receive overtime for hours worked over 40/week.
c. Have salaries increased to meet the minimum in the “salary level test.”
2. For employers:
a. The DOL estimates that the new rules will clarify overtime requirements for 8.9 million overtime-eligible salaried employees (5.7 million salaried white collar workers and 3.2 million salaried blue collar workers), and force employers to re-evaluate their employees’ status.
b. Employers will have to change the status of a DOL-estimated 732,000 workers who are already incorrectly classified.
Like it or not, one of the reasons the FLSA was passed was to ensure the financial balance of power between employers and employees, and to provide guidelines to ensure corporate America does not take advantage of its workforce. How the new FLSA changes will impact each law firm is to be seen and will vary from firm to firm. One thing for sure is that with the “Automatic Adjusting” change, DOL intends to keep the FLSA effective for the American worker, and we should expect more changes in 2019.
For more information on the DOL changes, visit here.
About the Author
James R. Gast, Jr. is the CEO of SpliceNet Legal Tech, an IT consulting business focused on law firms. He can be reached at firstname.lastname@example.org