The Curtain is Rising on the New Overtime Rules

Changes to the Overtime Rules are Here

On May 18, 2016, the Department of Labor announced the Final Rule defining and delimiting the changes in overtime exemption for Part 541 (“white collar workers”).¹  The new regulations significantly impact white collar overtime rules by more than doubling the salary threshold that would exempt an employer from paying employees overtime.  Prior to the new rules, if an employee qualified as a white collar employee, and had a salary more than $23,660 annually, then they were exempt from overtime pay.  The new rule changes that threshold to the 40th percentile of earning for full-time salaried workers for the lowest wage Census Region (currently the South), which is $47,476.00 annually ($913 weekly).² The threshold will be automatically updated every three years.  However, the Final Rule allows employers to satisfy up to 10% of the standard salary requirement with non-discretionary bonuses, incentive payments and commissions so long as they are paid at least quarterly.

What the Change Means to Businesses

The effective date of the Final Rule is December 1, 2016.   Employers should be taking action now to prepare.  The change in the overtime threshold for white collar employees will impact employers differently depending on the number of employees to be newly classified as non-exempt.  It is likely that the change may be felt more acutely by the retail and restaurant industries.

Cost to Employers

The cost to employers to incorporate overtime changes will vary depending on their industry size, sector and employee distribution.  However, the change itself is generally applicable and many businesses and employees will experience a substantial financial impact.  Accordingly, when CSRA businesses are budgeting, they should certainly consider the increased expense from the number of employees who are either given a raise above the new threshold to remain exempt or paid overtime because they are suddenly nonexempt.  Employers should also factor in the cost of initial compliance to include the changes in human resource and payroll.  For many businesses, there may also be cost associated with the possible increase in salary for employees up the chain if lower level employees receive raises because of the regulation.

Other Challenges

One additional challenge that businesses may face is the net negative impact on morale on staff from changes since many formerly exempt white collar employees will now be forced to “punch a clock.”  Some managers will now have to keep up with their lunch breaks, etc. and many will likely take issue with it.  However, if businesses focus some attention to their planning and roll out efforts they may more easily be able to highlight the positive aspects of the changes.

Steps to Prepare for the Overtime Changes

  1. Gather and assess information such as employee salary and total working hours. Taking the pulse of the organization is a great place to start.  Businesses should start to look at salary and benefit information to get an idea of how to most efficiently pay employees.  An employer should also take a close look at the hours of employees to assess how much time an employee spends both in the office and at home working.  Remember, responding to emails from cellular devices or home computers are a part of total working hours.
  1. Gather information about the actual duties of employees. An organization should take a close look at the duties of employees. The goal is to discover the actual activities performed in a position, not the written descriptions of the position, which are often outdated.  This step is important to determine how best to redistribute employees in the most efficient manner.
  1. Consider the Types of Changes Possible for your Organization to Comply with the Rules.
    a.  increase the salaries of currently exempt employees to the new threshold;
    b.  reclassify exempt employees as nonexempt and pay them hourly;
    c.  change staffing to eliminate the need for overtime;
    d.  change benefit plans.

The stage is set, and all of the actors in this production – regulatory agencies, employers and employees – must get ready to play their part.  It is imperative that local businesses take the time to familiarize themselves with the changes and start to take stock of their positions so that they can avoid the potentially crippling financial consequences of non-compliance.

overtime rules

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¹ The official document is scheduled to be published in the Federal Register on 05/23/2016 and will be made available online at http://federalregister.gov/a/2016-11754.
² The number was based on data from the fourth quarter of 2015.

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Doubling Down on Overtime Exemption

Current Overtime Law

The Fair Labor Standards Act (FLSA) requires that covered, nonexempt employees in the United States be paid at least the Federal minimum wage for each hour worked and receive overtime pay at one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek. However, there are a number of overtime exceptions to this rule. For example, the current law does not require employers to pay overtime compensation to executive, administrative, professional and outside sales employees who are paid on a salary basis and receive more than $23,660.00 per year or $455.00 per week, even if they work over 40 hours. See 29 U.S.C. 213(a)(1).   This is referred to colloquially as the “white collar exemption.”

Overtime Exemption Change

The Department of Labor (DOL) proposes to more than double the salary level that would qualify white collar workers for overtime exemption. Among other things, the proposal sets the standard salary level equal to the 40th percentile of earnings for full-time salaried workers as of 2016, which is projected to be $970 per week, or $50,440.00 annually for a full-year worker. More importantly, in order to prevent the salary levels from becoming outdated, the DOL is proposing to include a mechanism to automatically update the salary and compensation thresholds on an annual basis. The DOL estimates that during the first year alone, 4.6 million currently exempt workers would become non-exempt and entitled to minimum wage and overtime protection under FLSA, without some intervening act by their employers. See Federal Reg. Vol. 80, No. 128 (Mon. July 6, 2015).

Impact on Business

The period for public comment on the proposal closed on September 4, 2015, and the proposed change attracted both praise and criticism from worker’s groups and businesses. The comment period also served to demonstrate some of the confusion that exists under the current regulation such as the mistaken belief that payment of a salary automatically disqualifies an employee from overtime pay; or that if a white collar employee is in fact nonexempt she would have to be converted to hourly pay. See Federal Reg. Vol. 80, No. 128 (Mon. July 6, 2015). The specific impact of the proposed changes on the CSRA is difficult to project, but the potential impact could be staggering for some businesses. The pending approval of the rule would be a good time for local businesses to reassess the exemption status of their employees in preparation for the change, which many believe to be inevitable.

Since the ultimate burden of proof for the actual application of an exemption rests on the employer, employers should begin evaluating the exemption status of employees as soon as possible so that they have enough time to adjust to the proposed rule. While the proposed bright-line salary test is one step of meeting exempt status, it works in concert with the “duties test.” As was previously the case, job titles, descriptions and paying a salary versus an hourly rate are not determinative of exemption status. In order to qualify as exempt under the proposed rule, an employee must not only meet the more than doubled pay requirement, but employees must also continue to meet certain tests regarding their job duties. There is potential for employees/positions that have traditionally been exempt to be treated as non-exempt for the first time in their careers or the history of the position.

Moving Forward

The new overtime white-collar exemption rule will be issued approximately July 2016, according to the U.S. Department of Labor’s fall 2015 regulatory agenda.  The DOL may also make some changes to the “duties test,” which have yet to be proposed. The proposed change is particularly relevant in Georgia and South Carolina where the annual pay is often less than the national average. The bottom line is that it matters, and moving forward, employers should pay close attention to employee’s job functions and make sure they brace for the impact of change to their current classification structure. A specific strategy is based on the needs of each individual business, but reclassification will require an effective roll-out strategy for all. As the DOL gears up to double down on overtime exemption, CSRA businesses should not gamble with their economic security. Businesses should be prepared to incorporate a communication plan, maintain proper documentation of the reclassification and schedule training regarding policies affecting employees.

Salary Threshold Increase for Overtime Exemption

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