The holiday season is almost upon us, and with it comes one of the largest “gifts” the U.S. Department of Labor has ever provided – the new Final Rule on overtime pay effective December 1, 2016. Unfortunately for employers, this gift is heavily weighted in favor of increasing the scope of overtime pay for employees, and it does so by dramatically affecting who is an executive, administrative, professional, or highly-compensated employee under the Fair Labor Standards Act.
Although a number of organizations have filed lawsuits to challenge and try to block the Final Rule, at least so far no court has invalidated or enjoined its implementation. Therefore, employers are well-advised to begin preparing for the new salary and overtime requirements – a process that starts with understanding the changes, and then determining whether and how those changes might affect your workforce.
In summary, the Final Rule makes the following key revisions to the FLSA and its regulations:
*Raises the salary threshold from $455/week to $913/week – or $47,476 per year. (Nondiscretionary bonuses and incentive payments, including commissions, may account for up to 10 percent of the new required salary level, provided they’re paid at least quarterly.)
*Automatically updates the salary and compensation thresholds every three years to maintain the levels at the DOL-required percentile. (e., the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage census region in the United States, which is currently the South.)
*Raises the compensation level of an exempt “highly compensated employee” to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is currently $134,004.
*Requires NO change in the current “duties test” for each exempt category.
*Permits NO carve-out for charitable or other nonprofit organizations (but the organization or specific employees must still be subject to the FLSA).
*Permits NO carve-out for colleges and universities, but these entities will be given options to avoid paying overtime under the current FLSA regulations. (See DOL release guidance aimed at higher education.)
*Institutes a non-enforcement policy related to organizations that serve people with disabilities. (See DOL release guidance targeted at nonprofits.)
One of the best resources concerning the new Final Rule is a DOL Fact Sheet summarizing its terms – and copies can be obtained through the following U.S. Department of Labor website: https://www.dol.gov/whd/overtime/final2016/overtime-factsheet.htm.
Probably the most important decision for employers regarding the Final Rule concerns those currently exempt employees who are not being paid at the new annual salary level. This decision primarily involves whether to raise their salaries to at least $47,476 ($913/week), thereby maintaining their “exempt” status, or whether to reclassify them as nonexempt employees. Stated another way, given the new DOL requirements, employers have two main options with employees who satisfy an “exempt’ classification but aren’t paid at least $47,476: (1) increase their salary to at least the new threshold, which would avoid having to pay overtime; or (2) leave the employees in a nonexempt category and pay them hourly plus overtime.
Simply stated, advantages of treating employees as “exempt” include paying them for the job no matter how long it might take, not having to track or record hours worked, and not paying overtime for any hours worked over 40 hours in a workweek. Disadvantages include having to pay the exempt employee for an entire workweek no matter how few hours are actually worked (with certain limited exceptions), and strict limitations on making paycheck deductions which, if improper under the FLSA and its highly nuanced regulations, can sacrifice the exemption – not only for the affected employee, but also for other employees in the same job classification.
Advantages of treating employees as “nonexempt” include paying them only for hours actually worked, and having more ability to make authorized and other permitted paycheck deductions (such as recouping advanced but unearned vacation time upon termination of employment). Disadvantages include having a time-keeping system that must accurately track and record their hours work, and having to pay overtime at the rate of 1½ times their regular rate of pay for all hours worked in a single workweek. (Note: Employers may still pay an otherwise nonexempt employee on a guaranteed weekly salary basis, but an overtime “half-time” payment must still be made for any hours worked over 40 hours in a workweek, and other strict requirements regarding authorized and unauthorized deductions also apply.)
Recommended Next Steps
While not applicable to every employer, some recommended next steps in preparing for the Final Rule include at least the following:
First, identify which employees should be included in the group that will need to be given raises or reclassified in order to honor the new requirements. Remember that these individuals must still satisfy the “duties” test and other requirements for the applicable exemption – i.e., their job duties and other requirements must still meet the standards for an executive, administrative, professional or “highly compensated” employee. Note: This can be an excellent opportunity to conduct a self-audit in order to make sure your exempt employees are truly “exempt”, especially given the ever-increasing number of DOL legal challenges for misclassifying employees.
Second, and speaking of audits, this could also be an excellent time to review your standard wage & hour policies and procedures for tracking and recording working time, travel time, using mobile devices for work-related purposes during non-regular working hours, and otherwise working “off the clock”. The two latter concerns are particular issues for formerly exempt but now nonexempt employees who, starting December 1, must generally record and be compensated for that time as specific “hours worked.” Special training might also be needed for any reclassified employees and their managers about those policies, time keeping procedures and what is considered “compensable” versus “noncompensable” time.
Third, develop a new compensation plan for reclassified employees. If reclassified, and in order to stay within budgeted labor costs, employers will need to determine the proper regular rate of pay for these employees as well as expected overtime hours for which the higher overtime rate will need to apply (1½ times the regular rate of pay for each hour worked over 40 hours in a single workweek). To help this process, the DOL has given its blessing to a cost-neutral solution for assessing new compensation by using the following formula: Weekly salary / [40 hrs + (# of OT hours x 1.5)].
Example: A currently exempt employee is paid a salary of $800/week and usually works 50 hours per week. To reclassify that employee as nonexempt subject to overtime, but essentially maintain an $800/week job position, the following formula can be used:
$800 / 40 hrs + (10 hrs OT x 1.5) = $800 / 55 = $14.55/hr
Applying that calculation to any given workweek in which 10 hours of overtime are worked (at 1½ times the regular rate of pay), the new $14.55 hourly rate results in the following “neutral” effect:
40 hrs x $14.55/hr = $582
10 hrs x $21.82 = $218
$582 + $218 = $800/week
While not employer-friendly, the DOL’s new Final Rule can be implemented with relatively minimal adverse effect on employers. But making that happen takes planning and execution – and companies are well-advised to begin the process now since December 1 is fast approaching.