Time’s Running Out: Employers Must Adapt to New DOL Overtime Rules

For American employers, any surprises related to the U.S. Department of Labor’s new regulations affecting overtime and minimum-wage requirements should have settled in.

Now, it’s time to prepare for implementation.

The problem is, many employers have been slow to adapt. This isn’t good, for a number of reasons. While not strikingly complex, the rules are far reaching and impact most employers. Barring the success of lawsuits and legislative efforts seeking to delay their implementation, the rules are set to go into effect on December 1, 2016. What should companies do to prepare for the new rules? Know the changes. Huddle with your human resources department to ensure they’re versed on the requirements. Prepare your workforce – especially managers tasked with overseeing employees’ overtime. Finally, consult with legal, accounting, and H.R. advisors versed in the rules and their implications to ensure your organization is meeting the new requirements. For organizations that may not have been fully compliant with the overtime rules, the new rules present a chance for a “reset.”

First, a quick overview. Released earlier this year, the changes to the federal Fair Labor Standards Act regulations revised how employers handle compensation and overtime pay for administrative, executive, professional, and highly compensated employees and other workers who before the new rules were exempt from overtime pay.

The new rules will reduce the proportion of exempt workers and potentially boost compensation of many employees who will remain exempt. The salary threshold will double for those workers, with 4.2 million workers predicted to fall short of the new salary standard for exempt status. Using the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, which currently is the U.S. South, the minimum salary threshold for overtime will rise from $455 per week, or $23,660 per year, to $913 per week, or $47,476 per year.

“Highly compensated employee” exemptions will rise from $100,000 to $134,004, representing the 90th percentile nationally of “earnings of full-time salaried workers.”

Hourly or blue-collar workers will remain entitled to overtime pay.

These changes are fairly simple, but highly impactful. Though a lawsuit filed by 21 states seeks to delay implementation, this will only stall what many view as inevitable rollout. Pending legislation to delay the regulations likely will be vetoed even if it makes it through the Senate.  Thus, businesses must prepare now for the rules’ arrival.

The first task should be to review the two tests for each affected exemption. The “Duties Test” reviews the assigned work or duties of the employees in question. It defines the “primary duty” of the worker as the “principal, main, major or most important duty that the employee performs…,” according to the Department of Labor.  The duties tests remain unchanged.

The “Salary Test” reviews the salary basis for the employees. Again, this is a simple calculation with significant implications with the minimum guaranteed weekly salary rising from $455 to $913. So all those who currently are treated as exempt and are paid up to $913 a week will become non-exempt, unless their compensation is bumped up to the new minimum.

How should employers address the coming changes? Below are several considerations:

  • Address the salary test. How should an employer treat this salary test? One answer is to simply bump up the salary if the differential is small enough For lower salaried workers, such remediation could be fiscally untenable, and could raise compression problems if the salary boost creates issues for fellow higher level exempt employees..
  • When someone goes from salaried exempt to non-exempt, simply transition to an hourly rate which, with anticipated overtime, matches the employee’s prior salary.  While legal, this could have a significant budget impact if the newly non-exempt employee ends up working significantly more overtime than anticipated.
  • Alternatively, pay a fixed salary basis with additional half-time pay if newly non-exempt employees work more than 40 hours in a workweek. This is a legal and pragmatic way to reduce overtime exposure. This move also will mimic a salary for non-exempt employees, reducing the transition for these new non-exempt employees. However, this type of pay plan has some potential legal pitfalls so employers should seek legal advice before implementing this type of pay plan.
  • Prepare newly non-exempt workers and their supervisors to track hours. In what will no doubt create a paperwork dilemma for many workers and “supervisors,” those overseeing these hourly workers now will have to ensure accurate reporting and recordkeeping of hours worked. Employers already do this for non-exempt employees. But this will open a flood of employees affected by the changes. Train managers who haven’t done this before in record keeping, time recording, and overtime requirements and implications. Similarly, newly non-exempt employees will need to learn how to record time and what compensable work time is and what is not. This should be done in advance of the effective date of December 1.
  • Work closely with human resources. Analyze previous exempt positions and make sure they can use this opportunity to fix any issues that might have previously occurred. Look for ways to recognize and consolidate/upgrade positions to meet the new test.
  • Consider the effects and implications of commissions and bonuses. Except for exempt “highly compensated employees,” employers now will be permitted to apply quarterly and nondiscretionary bonuses, commissions, and incentive payments as up to 10% of the employee’s compensation. For several reasons, this creates risk, and the better approach is to pay the entire weekly minimum salary and adjust the commission or bonus structure accordingly.
  • Seek legal advice to make sure any adaptation adheres to existing regulations and the new rules that debut December 1.

This silver lining in this is that employers who were lax about analyzing duties of employees or otherwise misclassified employees as exempt can use opportunity to reclassify them as non-exempt without raising any red flags.

Additionally, there now will be predictable regularity to the release of future updates. Unlike previous thresholds, which were in place for decades, the DOL announced that every three years it will release automatic updates to the minimum salary threshold. The first such release is scheduled for January 1, 2020.

To be sure, employers have much to consider. Though the lawsuit challenging the December 1 effective date could prevail, it will only delay the regulations’ implementation. Even if successful, it will not eliminate them. So it’s up to employers to prepare now for the regulations arrival.

The essential take-away: Plan now. Any delay may buy some time, but not put off the inevitable.

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