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

HIGHLIGHTS:

  • The DOL's proposed rule requires a new weekly guaranteed salary of approximately $970 ($50,440 per year) for white collar workers to be exempt.
  • Nearly 5 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.

On June 30, 2015, the U.S. Department of Labor (DOL) released a proposed rule updating overtime regulations for executive, administrative and professional employees (commonly referred to as white collar employees). The DOL proposed rule will expand overtime coverage to nearly 5 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 proposed rule sets the salary threshold to the 40th percentile of weekly earnings for full-time salaried employees. So when the rule goes into effect in 2016, the DOL estimates the threshold will increase to $970 per week ($50,440 per year). The proposed rule includes an annual automatic update to the weekly guaranteed amount using a fixed percentile of wages or the Consumer Price Index (CPI) for all urban consumers. Of course, the final version of the rule may alter the minimum guaranteed weekly salary formula. No changes have been proposed to the duties test, but that may change in the final rule.

Employers Will Face Numerous Challenges to Comply

This proposed rule, if adopted, will present some challenging issues for employers. For example, an employer may now have many more white collar employees who qualify for overtime. In addition to a significant increase in labor costs, employers will be required to adopt protocols to ensure 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.

Employers also will be faced with having to predict changes in the minimum weekly guarantee from year to year because the weekly guarantee may fluctuate year to year. In other words, employees whose weekly guaranteed salary is close to the minimum requirement may be exempt in one year but lose their exempt status the following year – even if their duties remain the same.

Options for Employers

Employers have options to deal with this development. 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. Although the change in the minimum weekly guaranteed salary will not take effect for some time, employers should begin to plan for the change so the disruption to their operations and bottom lines can be minimized.