As most are aware, on May 18, 2016, the U.S. Department of Labor (DOL) released its much anticipated final rule, drastically increasing the salary requirements to qualify as an exempt executive, administrative or professional employee. The DOL estimates that the final rule will extend overtime protections to 4.2 million workers in the first year of implementation and boost wages by $12 billion over the next 10 years. The rule is set to become effective Dec. 1, 2016.

Legal Challenge

Even as the deadline for compliance grows near, 21 states have sued the DOL, including Wisconsin, claiming the DOL had no authority to adopt the sweeping new overtime rules. At the same time, more than 55 Texas and national business groups, including the U.S. Chamber of Commerce, have challenged the overtime rules in a similar lawsuit. Both suits were filed in the U.S. District Court for the Eastern District of Texas.

Summary of the final rule

The final rule:

  • Increases the applicable salary threshold from $455 per week, or $23,660 per year, to $913 per week, or $47,476 per year;
  • Allows non-discretionary bonus and compensation to satisfy up to 10% of the salary amount, if paid no less frequently than quarterly; and
  • Increases the compensation level for “highly compensated employees” subject to a more minimal duties test from its previous amount of $100,000 to $134,004 annually.

These compensation changes will go into effect Dec. 1, 2016, and will be updated every three years to the 40th percentile of full-time salaried workers in the lowest income census region of the country (currently the South). The threshold is expected to rise to more than $51,000 by the first update Jan. 1, 2020. The final rule does not include any changes to the duties tests, which also affect the determination of who is exempt from overtime.

What should employers do in response to the final rule?

The outcome of the litigation is anything but certain. In spite of this lawsuit, employers must be prepared to move forward and implement changes, if necessary, based on the DOL’s new overtime rules. The following steps may be helpful in preparing our response to the final rule.

  1. Audit the current exempt workforce to determine which employees fall below the proposed salary basis test.
  2. Assess the number of hours of overtime typically worked by those employees to determine whether a change to hourly status will have a significant impact on compensation.
    1. Supervisory employees assigned to drive other crew to the worksite may be engaged in compensable task.
    2. Pre-jobsite meetings, crafting and sharing electronic reports, or reviewing electronic communications may all become compensable hourly tasks for an hourly employee.
  3. Conduct a cost-benefit analysis to consider raising the salary of those employees, or reclassifying them as nonexempt and paying them overtime.
  4. Determine proper hourly pay rate in order to recreate competitive compensation model.
  5. Consider whether any alternative compensation methods might be available, such as a BELO arrangement, whereby hourly employees are essentially paid on a salary basis, but must qualify under strict requirements.
  6. Retrain employees who are reclassified as non-exempt regarding payment for all hours worked; no work performed “off the clock.”

This is also a great time to review whether exempt employees meet the “duties” test, and whether any non-exempt employees are working off the clock, such as working through a lunch hour or starting early. The impact of improper classification, or failing to pay for all hours worked, can be in the hundreds of thousands or millions of dollars when pursued as a class action.