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The New Overtime Laws: Effect on Self-Storage Operations

Aug 17, 2016

Two years after the President directed the Department of Labor (“DOL”) to change the minimum salary for exemption as a “white collar” worker, and over a year after the actual Notice of Proposed Rulemaking was published, DOL was finally able to announce that the new minimum salary for exemption will increase from $455/wk to $913/wk, effective December 1, 2016. (To the surprise of many observers, the duties tests were not affected).

The Exemption

The federal wage and hour law, the Fair Labor Standards Act of 1938, 29 U.S.C. 201, et seq., requires covered employers to pay their employees a minimum wage, currently $7.25 per hour, and overtime at time and a half for hours worked over 40 in a workweek. There are a number of exceptions (exemptions) to these rules, however. The most prominent exemption is for so-called “white collar” workers—29 USC 213(a)(1). This is a complete minimum wage and overtime exemption for bona fide executive, administrative, and professional employees and outside sales employees.

Neither titles alone, nor salary status alone, makes employees exempt. There are certain “duties tests” for each of these categories of worker. For instance, executives must have management as their primary duty, must supervise at least two full time employees or the equivalent, and must have the power to hire and fire, or recommend hiring, firing, or other change of status. Regardless of title or written job description, the duties of employees must comport with the tests laid out in the controlling regulation, which is 29 CFR 541.

The “duties tests” are only part of the story, however. There’s also a “salary test.” Almost all the workers to be considered for this exemption must also be paid on a salary basis, meaning they get the same salary every pay period, regardless of hours worked (there are several exceptions). And there is a minimum salary amount. Since 2004, the minimum salary for exemption has been $455 per week. Effective December 1, 2016, this test jumps immediately to $913 per week or $47,476 per year. Surprisingly, there is no gradual or phased-in increase—on December 1, the salary test doubles.

The New Rule

The new rule doesn’t just increase the salary required for exemption this year. Automatic updates are built into the regulation—every three years, beginning January 1, 2020, the salary test will be re-evaluated. DOL will post the new salary levels 150 days prior to their effective date, with the first revision due out on August 1, 2019.

There is also an upper level test for “highly compensated” employees (“HCE”). At this salary level, the duties tests standards for exemption are greatly relaxed. The current highly compensated level is $100,000. On December 1 this figure will be $134,004 per year ($2,577 per week).

Novel Provisions

There are a few concepts in the new rule which have never been part of the regulations before. The automatic increase in the salary tests is one such provision. In addition, says DOL, “up to 10 percent of the salary threshold for non-HCE employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis.”

What Should Employers Do To Prepare For The Increases?

Employers should consider the following:

  • Look at all the employees whom they currently classify as exempt, and identify those who make less than $913 per week, as well as those who make between $100,000 and $134,004 per year.
  • For employees who are close to $913 per week, the simplest approach is to raise their salaries to $913.
  • For employees making substantially less than $913, the options are:
    1. Continue paying on a salary basis, but start keeping records of their hours worked and paying them overtime. For currently salaried employees who don’t work much overtime, this is probably the easiest and least disruptive approach, OR
    2. Convert them to hourly, record their hours and pay overtime. To do this, employers need not divide current salaries by 40. Rather, employers can project how much overtime the employees are likely to work and set the hourly rate so that if the employees work the projected hours, they will earn close to what they were making while on salary. (Note: this is a one-time or at least very infrequent adjustment. Employers who adjust hourly rates every pay period to make the employees’ grosses come out to a set amount are in violation).
  • Manage/distribute workload better. For instance, in a small retail store, managers may work 50, 60 even 70 hours per week and more. Employers may have to reallocate hours, and even hire additional hourly workers.
  • For HCE’s, considerations are similar, but keep in mind that the HCE level is primarily intended to exempt employees who are well paid but whose exempt duties are somewhat marginal. HCE’s who clearly meet the duties tests need not be changed.  HCE’s making close to $134,004 per year whose duties test compliance is marginal could get raises.
  • HCE’s making considerably less than $134,004 and whose duties tests compliance is marginal may need to be reclassified non-exempt, or their duties changed to clearly meet the regulatory requirements.

How Does This Change Affect the Typical Self-Storage Facility?

For most self storage businesses, the change in the salary test will have very little impact at the storage facilities themselves, although it will have a significant impact at the home office. This is because most of the on-site employees, even the on-site “managers,” don’t qualify for exemption at any salary level. In order to be exempt as managers, such employees would have to supervise a minimum of two full-time subordinates or the equivalent. That’s 80 hours’ worth of subordinates per week. Most facilities have only two employees, frequently, but not always, a couple who jointly manage the facility and live on the premises and sometimes a part-time maintenance employee.

Larger facilities with more employees may be able to sustain an exempt manager, but it’s hard to imagine they would sustain more than one.

In the home office, though, there may be a number of salaried employees whose duties would qualify them for exemption. These are the types of employees likely to be affected by the change. For these employees, the suggestions on how to prepare for the change are applicable.

Managers Living On Site

There are still a number of employees, most with the title of manager, who live on site. As noted above, they typically don’t qualify for exemption. However, for such employees the traditional method of compliance with the FLSA is the “reasonable agreement” as to the number of hours for which the employees will be paid. Very briefly, DOL regulations address employees who live on their employers’ premises as follows:

An employee who resides on his employer's premises on a permanent basis or for extended periods of time is not considered as working all the time he is on the premises. Ordinarily, he may engage in normal private pursuits and thus have enough time for eating, sleeping, entertaining, and other periods of complete freedom from all duties when he may leave the premises for purposes of his own. It is, of course, difficult to determine the exact hours worked under these circumstances and any reasonable agreement of the parties which takes into consideration all of the pertinent facts will be accepted. 29 CFR 785.23

Designing such agreements so that they will stand up in a DOL investigation or in litigation is tricky and employers should seek legal advice from competent counsel.

Help is Available!

Employers who feel they need help in complying with the new rules can consult with an experienced employment attorney. Assistance can also be obtained by contacting the nearest office of the U.S. Dept. of Labor, Wage and Hour Division.

About the author:

Brian T. Farrington, JD, is an attorney with Cowles & Thompson, PC in Dallas, where he is head of the Employment Law Section. He is a former Investigator and Assistant District Director with the U. S. Department of Labor, Wage and Hour Division. As a lawyer in private practice, Brian has extensive experience in the self-storage industry. He is the author of “A Wage/Hour Guide for the Self-Storage Industry,” published in 2006 by the Self Storage Association.