On May 18, 2016, the U.S. Department of Labor (DOL) issued a new rule that doubles the salary threshold for overtime exemption under Fair Labor Standards Act (“FLSA”). The rule is anticipated to extend overtime eligibility to an estimated 4.2 million workers who are currently classified as exempt. This rule takes effect December 1, 2016.
The key provisions of the new rule include the following:
- Increase in Salary Threshold: The rule sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South. As a result, the salary threshold requirement to be exempt increases from $455 per week to $913 per week, or $47,476 annually for a full-year worker.
- Increase to Highly Compensated Employee Threshold. The new rule sets the total annual compensation requirement for highly compensated employees (HCE) at $134,004, which is equal to the 90th percentile of earnings of full-time salaried workers nationally.
- Salary Thresholds are Locked for Three Years. The new rule establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at mandated percentiles and to ensure that they continue to provide useful and effective tests for exemption. The first automatic update will go into effect on January 1, 2020.
- Bonus Payments Can Count for 10% of Salary Requirement. Employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level. This cap applies no matter how high the bonus may be. Examples of such payments may include, nondiscretionary incentive bonuses tied to productivity and profitability.
- Duties Test Remains the Same. In its proposal last year, the DOL sought input on whether changes should be made to the duties test concerning the white collar exemptions. Specifically, the DOL asked if it should mirror California’s rule that requires that a worker must spend at least 50 percent of his or her time on exempt duties to qualify for an exemption. The final rule made no changes to the duties test.
Given the substantial increase in the salary level set by the DOL, employers will have to analyze the status of all employees who earn below the salary threshold but were previously exempt. In such cases, employers will have to consider whether to reclassify those employees as nonexempt and eligible for overtime or give them raises to maintain their exempt status.
Employers may also consider restructuring its workforce to limit the amount of overtime exposure. One option would be to hire additional non-exempt employees at a lower hourly rate of pay than the current reclassified employees, to reduce the need for current employees to work overtime at a higher hourly rate. Where necessary, some employers may feel compelled to reduce the number of employees in certain exempt positions and distribute their responsibilities to other exempt employees or use the salary of laid-off employees to cover the increase in overtime costs it may experience. Many employers will likely have consider a combination of these options.
The new overtime rule requires employers to pay close attention to the classification of employees, hours worked, assigned job duties, how time is tracked and how compensation is paid. As the new rule becomes effective December 1, 2016, employers must take action now to be prepared to comply.
#1 Review the Status of Your Current Employees
Employers should conduct an audit of their current workforce and figure out which positions might have to be reclassified as non-exempt and eligible for overtime under the new rules and/or will require a salary bump to meet the new minimum salary threshold. If a position is to remain classified as exempt, special attention should be given to ensuring that the actual job duties qualify for the exemption. In making this determination, employers should ensure that job descriptions are current and accurately describe the actual job duties.
#2 Identify Options to address Salary Increases
As mentioned above, employers may opt to implement an across-the-board salary increase to comply with the new rule. For most employers, an across-the-board increase is not practical. Thus, many employers will have to weigh the pros and cons of increasing the salary levels of certain positions versus paying overtime, hiring more employees to reduce number of hours worked per employee, etc.
#3 Evaluate how Work Gets Performed
Employers may have to also restructure how work is performed. For example, the new rule could affect employees’ ability to perform work on nights or weekends. Currently exempt employees may routinely answer phone calls and emails after the normal workday, or work nights and weekends without additional compensation. If some of these employees are reclassified to non-exempt status, any time they spend working after normal work hours is compensable and must be tracked. This raises a lot of operational concerns and questions by employers including: Should employers prohibit employees from having access to email outside the office? Should employers cut-off access to email after working hours? How would the employer achieve this from a technology standpoint? Does the company need to issue its own mobile devices to employees? Obviously, there is a lot of decision making that must take place regarding how work gets performed, especially for employees that currently perform job duties outside of the workplace.
#4 Implement Time-Keeping Policies
By increasing the number of non-exempt employees, employers will be exposed to additional wage and hour liability exposure. Accurate time-keeping and record keeping must be a priority. This may require the purchase of new time record devices and software. Also, employers should review their current employee handbooks and policies regarding time keeping and overtime. In particular, employers should have policies in place that require employees to accurately report time worked, prohibit working overtime without authorization, prohibit off-the-clock work, and provide a reporting mechanism to address payment errors.
#5 Train your Team
Having sound policies is important, but seldom sufficient by itself. It is equally important to train employees about the new overtime regulations, the company policies, the company’s expectations, and the consequences of non-compliance. For example, supervisors must understand what role they are to play in monitoring work hours and time keeping compliance. They must be involved in policing off-the-clock work, as well as other activities that were not a concern when employees were classified as exempt. This may involve monitoring the length of lunch breaks, keeping track of employees leaving work early to attend family events, or tracking incidents when employees arrive to work late. Because re-classified employees may likely view the transition as a demotion, careful thought must be given as to how to communicate these types of changes and who the right person(s) is to explain the changes.
In light of the new overtime rule, employers are now faced with challenging decisions. For many employers, complying with the new rule will require a myriad of changes including their compensation structure and how they conduct business. It is possible that Congress may pass the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773), legislation that would stop the rule until the DOL performs a better economic analysis of the rule’s impact on specific sectors. Until then, employer should proceed to make the changes necessary to comply with the new rule.