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.
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
- 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.
- 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.
- 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.
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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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