In a recent post, my partner, Anne Yuengert, wrote about the DOL’s new overtime rule and the changes that go into effect December 1, 2016. Most significantly, the rule increases the minimum salary requirement for the executive, administrative, and professional exemptions from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). In addition, the minimum salary threshold for the highly compensated employee (HCE) exemption will jump from $100,000 per year to $134,004 per year. According to the DOL’s projections, these changes are expected to affect over 4.2 million U.S. employees.
If an employee is currently a salaried exempt professional, administrative, or executive employee earning between $455 and $913 weekly, on December 1, that employee will lose his exempt status and must be paid overtime for all hours worked over 40 in a workweek. There is an exception for lawyers, doctors, and teachers, who do not have to meet a minimum salary requirement to qualify under the professional exemption. This change to the minimum salary requirement is expected to significantly increase employer overtime costs, particularly in certain industries, such as food service, hospitality, and retail.
What Should Employers Do?
There are some measures that employers should take – and should take now. Initially, you should inventory your workforce and gauge how the new rule will affect your individual jobs and your overall labor costs. You should also consider whether there are changes to your compensation structure or other strategies that might alleviate the impact of the new rule. Some of the possible options are:
- If you have exempt employees currently making a salary of less than $913 per week, consider raising their weekly salaries to at least $913 so they remain exempt. As a practical matter, this may work only for those employees who are already reasonably close to the new $913 minimum. You can alleviate the impact of an employee’s salary increase by reducing other components of the employee’s compensation, such as a year-end bonus. Also, if you give an employee a higher salary to maintain the exemption, there is nothing to prevent you from requiring additional work. Before doing this, you should check to be sure that the employee’s duties clearly meet the exemption.
- You can keep the employee’s salary constant, but make it clear that the salary is based on an expectation that the employee will work a specific number of hours each week. By setting the employee’s expected hours higher, you can effectively lower the regular hourly rate that’s used to compute the employee’s overtime pay. Remember, though, that since the employee is no longer exempt, you must track hours and pay 1½ times the regular rate for all hours worked over 40 in a workweek. With this approach, you must have the employee record all the hours worked each week.
- You can reduce the employee’s salary to keep the employee’s total compensation level. If you have a good estimate of the overtime an employee will work, you can set the new pay rate for that employee, factoring in that overtime, so that the employee’s overall pay will remain relatively unchanged. However, before going down this path, you should consider what impact this reduced salary could have on employee morale and workplace turnover. Again, you must have the employee record all hours worked.
- Manage your non-exempt employees’ overtime carefully. The new rule will have no effect on your labor costs if your employees do not work over 40 hours in a week. Require all non-exempt employees to record all hours worked and seek advance approval to work overtime. Use your disciplinary process to ensure compliance with your overtime policies.
- Look at other workplace modifications that might reduce your overtime costs. Do you have positions that could be restructured in a way that reduces the need for overtime work? For instance, are there situations where you could use two part-time employees instead of one full-time employee to avoid unnecessary overtime?
- Consider whether you should use alternative methods of compensating your employees. As we noted previously, some employers may benefit from paying their employees on a fluctuating workweek basis. Under this method of payment, the non-exempt employee receives a guaranteed base salary each week regardless of the hours worked and must still be paid overtime for all hours worked over 40. However, because of the way overtime is calculated under this method, the total amount of overtime compensation is often reduced. Other compensation schemes, such as paying employees on a day-rate basis, might be advantageous in some situations.
Use Your Time Wisely
The new rule will likely result in some cultural changes in your workplace that you will need to plan for and manage carefully. Previously exempt employees who lose their exempt status will have to start recording their time. As a result, you may need to change procedures, implement automated systems, conduct training, and give employees a chance to adjust.
You should also use the new rule as an opportunity to review your job classifications and make any changes that may be needed or overdue. The new rule does not make any changes to the duties test for the executive, administrative, or professional exemptions. However, if you have employees who have been misclassified as exempt under that test, this may be the perfect time to get those issues fixed.
You have time to prepare for the upcoming changes, but you should use that time wisely.