DOL changes overtime rules

On May 17 the Obama administration announced the final overtime rules that we alerted you to in a recent memo (reproduced below). The following changes will take place on December 1:

• The new overtime pay threshold will be $47,476 a year for employees working more than 40 hours per week. The final rules allow up to 10% of the salary threshold for non-highly compensated employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided they are paid on at least a quarterly basis. This threshold can be increased every three years, beginning January 1, 2020.

• In the proposal, the annual compensation needed to exempt highly compensated employees was proposed to increase from $100,000 to $122,148. However, in the final law, that number has been increased even more, to $134,004.

• The final rules did not make any changes to the “duties” test that determines eligibility for overtime pay.

Proposed DOL changes

In 2014 President Obama directed the Department of Labor (DOL) to update the regulations defining which white collar workers are protected by the Fair Labor Standard Act’s minimum wage and overtime pay protections. These regulations were last updated in 2004. The Department wants to update the level required for exemption and to simplify the identification of nonexempt employees. A notice of proposed rulemaking was published on July 6, 2015, inviting interested parties to submit comments on the proposed rule. The final regulation could be issued as early as next month. Although you should not make any changes until the final law passes, we can help you gather the information and compare the alternatives now to make the decisions that are best for you and your business upon enactment.

In the proposal the DOL had suggested that workers who earn up to $50,440 would be automatically eligible for overtime pay. As a concession to responses from many groups and organizations, this has been revised down to $47,000. This is nearly twice the current overtime pay threshold of $23,660, which means that many more employees will qualify for overtime pay if they work more than 40 hours per week, even if they are in managerial positions. The total annual compensation needed to exempt highly compensated employees would go from $100,000 up to $122,148. In addition, for the first time, these salary thresholds will be automatically adjusted each year. The proposed regulations did not include discretionary bonuses towards an employee’s salary threshold either, although the DOL received many comments asking that these bonuses be included in salary calculations. Similarly, payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits, have been excluded in calculating salary levels.

Under the current rules, the standard of who is entitled to overtime pay is what their main duties are, not how much time they spend on other tasks. For example, a store manager who also helps customers sometimes is still a manager, and exempt from overtime pay, because managing other employees is his main job. But under the new rules, the primary-duties test may be replaced with the California Test, which says that someone who spends more than 50% of his time on non-exempt tasks is eligible for overtime pay even if his main job is usually considered exempt. Using the example of the store manager, if he helps customers or stocks shelves more than 50% of his time will now be eligible for overtime, whether or not his salary meets the new higher threshold.

What should employers do to comply with these new regulations?

• Set up a system to track each employee’s work hours.

• Make a list of all employees, including current salary, their role, the classification of their role, and the number of hours they work. It is very important that this list be reflective of what the employees actually do on a day-to-day basis, and not just what is listed in their job description.

• Once you have your list, review each employee’s hours to see if they would be eligible for overtime pay.

• Use 40 hours per week to calculate each employee’s hourly rate of pay and, assuming each employee continues to work the same amount of overtime, calculate the additional pay required under the new rules. This will give you the information to help make decisions about changes.

• Communicate the possible changes to affected employees to prepare them for the potential impact.

Since the proposed changes affect the ability to establish flexible schedules for those employees impacted by this new law, employers have three main options to consider:

Raise salaries to the exemption threshold: this would cause employers to incur additional costs for higher salaries for each affected employee.

Reclassify affected employees and do not limit overtime: this would cause employers to incur additional costs for overtime. To assess the impact of this decision, employers must know how many hours their employees are working so they set their pay structure appropriately. For example, you might change an employee from salaried to hourly and adjust the hourly rate to reflect the expected overtime hours. However, if the employee begins working more overtime hours than before, this could have a significant financial impact.

Reclassify affected employees and prohibit overtime without authorization: this would like reduce the number of hours that some employees work. While this limits the financial exposure, affected employees cannot do the same amount of work in less hours.

Fourth option: A fourth option is to take no action. Without making any adjustment in the rate of pay for each affected employee, this option would likely result in the highest amount of additional pay because all hours over 40 hours per week would be subject to overtime pay.

Employers could be subject to an increased possibility of actions by disgruntled employees about the accuracy of their pay. That is why the establishment of an accurate system to track employee’s work hours is the most important first step you can take. The risk of not complying with these laws is that the employee can claim that he or she has been misclassified and due overtime pay as back wages for up to the previous three years.

Please contact us to discuss how this proposed new law affects you.