Employers Will Need to Pay Overtime Wages to More White Collar Employees

HIGHLIGHTS:

  • The U.S. Department of Labor's (DOL) new overtime rule requires a new weekly guaranteed salary of $913 ($47,476 per year) for white collar workers to be exempt.
  • Approximately 4.2 million salaried employees across the U.S. will now be entitled to overtime pay.
  • Employers have a range of options to reduce the increased overtime costs.

The U.S. Department of Labor (DOL) on May 18, 2016, released its rule updating overtime regulations for executive, administrative and professional employees (commonly referred to as white collar employees) under the Fair Labor Standards Act (FLSA). The DOL rule expands overtime coverage to roughly 4.2 million employees.

Currently, based on regulations from 2004, in order for white collar employees to be exempt from overtime requirements, they must meet certain job duties-related tests and be paid on a salary basis at a rate of at least $455 per week ($23,660 per year).

The new rule more than doubles the salary threshold to equal the 40th percentile of weekly earnings for full-time salaried employees in the lowest income region of the country (the South), as reported in the U.S. Census. That threshold is $913 per week ($47,476 per year). This amount is about $3,000 less per year then the DOL estimated in late June 2015 when it issued its Notice of Proposed Rulemaking. Notably, for the first time, employers will be able to count nondiscretionary bonuses and commissions toward as much as 10 percent of the minimum salary requirement.

The new rule is set to take effect on Dec. 1, 2016.

The highly compensated employee exemption minimum annual salary requirement is also increasing from $100,000 to $134,004, which is equal to the 90th percentile of the weekly earnings for full-time salaried employees in the lowest income region of the country, as reported in the Census. This amount is about $12,000 higher than what the DOL estimated in late June 2015.

The new rule includes an automatic update every three years to ensure that the threshold is maintained at the 40th percentile of full-time salaried employees in the lowest income region (or 90th percentile for the highly compensated employee exemption). Based on current wage growth projections, the annual salary threshold is expected to increase to more than $51,000 with the first update on Jan. 1, 2020.

Importantly, the duties test has not changed. Further, outside sales employees, attorneys, doctors and computer professionals paid on an hourly basis are not impacted by this rule change because their exempt status is not subject to the salary basis test.

Employers Will Face Numerous Challenges to Comply

This new rule presents some challenging issues for employers. In addition to a significant increase in labor costs, employers will be required to adopt protocols to ensure that their nonexempt salaried employees are paid overtime at the proper rate.

For example, if nonexempt salary employees receive non-discretionary bonuses, the employer will need to recalculate the regular rate of pay for the period covered by the bonuses and make adjustments to prior overtime payments. Employers also will be required to ensure they track the hours worked of their nonexempt salaried employees closely. This may require the implementation of a time clock system or computer-based time entry system. Particular attention may need to be given to a newly nonexempt employee's preliminary and postliminary work activities to determine if those activities should be treated as compensable time. Similarly, attention should be given to travel time incurred by newly reclassified employees to assess whether and to what extent that time should be considered compensable time and if adjustments to travel schedules should be implemented.

Employers also will need to evaluate telecommuting and other alternative work arrangements to determine whether compensable time can be realistically managed and tracked from remote locations. Reclassified employees also will need to be reminded about when they are permitted and not permitted to engage in work-related activities outside of scheduled work hours. For example, many reclassified employees may have routinely checked and responded to work-related emails and texts outside of their normal work hours. An employer will need to decide if this type of activity should continue once the employee is reclassified and communicate its decision to the affected employees and their supervisors.

Employers should review, and revise if necessary, employee handbooks and other employer policies and procedures relating to overtime, timekeeping and compensable time. Updated policies should be reviewed with employees impacted by reclassification and their supervisors.

Prior to the effective date of the new rule, employers with exempt employees who have annual salaries between $100,000 and $134,004 will need to reevaluate whether these employees meet all the requirements of at least one of the duties tests.

This is an opportune time for employers to evaluate all of their exempt positions against the applicable duties test so that any erroneous classifications can be corrected at the same time as the reclassifications required under the new rule.

In the event of a large number of employee reclassifications, an employer's messaging is critical to ensure a smooth transition and maintain employee morale.

Employers also will be faced with having to manage ongoing reclassifications every three years. Employees whose weekly guaranteed salary is close to the minimum threshold may be exempt in one year but lose their exempt status the following year as a result of an automatic update – even if their duties remain the same.

Options for Employers

Employers have options to deal with the impact of the new rule. First, they may convert the nonexempt salaried employees to an hourly pay basis. This will facilitate tracking and paying overtime but may be viewed by the affected employees as a demotion. Alternatively, an employer may be able to take advantage of the fluctuating workweek approach, which can result in a substantial reduction in overtime pay costs. To offset the anticipated additional overtime costs, employers also may choose to reduce the size of the payroll, reduce the compensation of employees, or reduce bonuses or future compensation increases.

Employers who have not yet planned for the change in the overtime exemption rules should begin doing so immediately so the disruption to their operations and bottom lines can be minimized.