Employers anxious to learn what exactly will be required of them under new overtime rules will need to wait a bit longer to learn what exactly those rules will require, according to a U.S. Department of Labor statement last week.

The Department of Labor (DOL) has proposed amending the rules that govern overtime for salaried workers under the Fair Labor Standards Act (FLSA) by more than doubling the salary threshold for mandatory overtime coverage. If the rules are revised as anticipated, in 2016, about 5 million more American employees will be eligible for overtime wages, and employer payrolls will swell as a result.

The new regulations were anticipated to be rolled out in early 2016, but last week, the Solicitor of Labor, Patricia Smith, announced that the rules may not be forthcoming until later next year. Ms. Smith cited the large volume of comments received in response to the proposed rule--nearly 300,000, many in opposition--as the reason for the delay. However, analysts predict that the delay may indicate that the DOL is considering making changes to the duties test. Although the DOL's proposed rule did not suggest changing the duties test, it did ask for public comment regarding the test and said that the agency was considering whether revisions to the test were necessary.

The Proposed New Rules

Under the proposed DOL regulations, the salary at which workers become exempt from overtime will jump from $23,660 to $50,440--nearly the median U.S. household income. All employees earning less than $50,440 (or $970.00 per week) will now be eligible for overtime pay, thus sweeping in some managers and supervisors into the overtime-eligible pool.

In order to be exempt from this overtime rule, a worker must be paid a fixed salary that meets the new $50,440 threshold, and his or her primary duty must be executive, administrative or professional. The second half of this "white collar" exemption rule is called the "duties test."

Real Cost to Employers

The Obama Administration touts the change as a boost to "help shore up the middle class," and the DOL asserts that the revisions will simplify the overtime exemption rule, making it "easier for employers and workers to understand." Although the salary threshold provides a clear standard that might reduce wage disputes and litigation costs in the long term, right now the impending change is making employers rush to reallocate work and recalculate costs.

According to the Bureau of Labor Statistics, U.S employers spend an average of $540.80 per employee on overtime each year. Apply that price tag to the 5 million additional workers eligible for overtime under the new rule and you're looking at a cost to employers of $2 billion in the first year of implementation, estimates the Wall Street Journal.

Uncertainties Remain

Despite the bright-line rule, questions linger about what counts as compensation--such as bonuses and other forms of payments that may not count toward salary--as well as when the final rule will be issued.

Together, this invitation for public comment and the recent news about the rule's delay raise concerns that the DOL could make substantial changes to the duties test when it issues the final regulations. This could create a particular hardship for industries such as fast food, restaurant and hospitality, in which "exempt" managers may perform a significant amount of "non-exempt" work during busy periods or when non-exempt employees are absent.

Practical Advice

As the New Year approaches, employers should start crunching the numbers and evaluating how best to cope with the new rules to minimize the negative impact the increased liability will have on their businesses. Employers may consider the following:

  • Reduce employee hours to trim potential overtime costs;
  • Restructure existing positions to minimize the amount of traditionally "exempt" work to be performed by workers;
  • Raise employee salaries to the new threshold so currently exempt workers stay exempt; or
  • Reclassify workers who have heretofore been exempt as non-exempt and adopt and enforce strict rules prohibiting overtime.

Ultimately, if the proposed regulations go into effect, nearly all employers will see a very tangible impact on their workforces and costs.