25 May Ready or Not, Overtime Rule Changes Are Here
In July 2015, President Obama and the Department of Labor announced preliminary changes to the federal overtime rules. After much anticipation by employees and employers alike, the final rule was uploaded to the Federal Register website on May 18, 2016. These overtime rule changes are expected to affect 4.2 million workers and cost employers about $12 billion over the next 10 years.
Summary of Rule Changes
The effective date of the Final Rule is December 1, 2016. According to the Department of Labor, here are the key provisions:
- The Final rule sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
- The Final Rule sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- The Final Rule establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
What This Means For Employers
Employers have about 6 months to determine which employees are affected and how they will handle the changes. As of December 1, 2016, aside from jobs that are classified as exempt by definition (e.g. teachers, lawyers, doctors), an employee can be exempt if they meet each of the following 3 tests (sometimes called the white collar exemption tests):
- They are paid on a salary basis. In other words, if their pay is not reduced for working less than 40 hours per week.
- They are paid at least $913/week ($47,474 / year). The new rules established that this amount will be automatically updated every 3 years beginning on January 1, 2020.
- They perform certain job duties defined by the Fair Labor Standards Act. These duties are broken out into three categories: executive, professional, and administrative.
What Employers Should Do
- Review existing job classifications. If job descriptions are not current, they should be updated to reflect the employee’s current role. Having an accurate description of each employee’s responsibilities and authority level will serve as a basis for applying the FLSA duties test for exemption from overtime.
- Determine which employees are affected by the proposed changes. Determine if employees who are exempt under current regulations will be exempt under the new regulations. Employers will need to decide whether to increase the salary of those employees near the salary threshold in order to continue to classify them as exempt, or whether to convert their salary to an hourly rate by dividing the salary by either the number of hours typically worked or by 40 hours.
- Analyze business impact of the proposed changes. While dividing the salary by the number of hours typically worked will probably be the least expensive option, at least initially, for employers when converting employees from salary to hourly, this method has the potential to significantly affect employee morale. Employers should consider both the direct financial impact of their decisions (additional dollars spent on wages) and indirect financial impact of their decisions (loss of productivity due to decline in employee engagement levels) when making decisions about how to handle the Obama overtime rules changes.
- Evaluate business environment. Now is an ideal time for employers to look at their processes to determine if efficiencies can be gained through streamlining or automation. Efficiencies can lead to a reduction of work hours for employees who will be eligible for overtime under the proposed regulations, which, depending on how the salary is converted to an hourly rate, can allow the employee to retain their current income levels while working less.
- Ensure that there are systems in place to accurately track hours worked and properly calculate overtime. Since many employers will have an increased number of hourly employees, attention should be paid to both how hours are tracked and how overtime is calculated.
- Review your company policy regarding work performed after hours. Many employees check work emails or take business related phone calls while they are not at work. If those employees are exempt, they are not entitled to additional pay for time worked on their own. For non-exempt employees, however, all time worked is compensable, whether it is in the office or out of the office and during work hours or after work hours. Companies may need to consider implementing an Hours of Work Policy specifically stating that non-exempt employees should not use electronic communication devices for work related activity after work hours unless otherwise required by management.
FLSA / Wage and Hour matters are the fastest growing type of employment litigation today. According to the US Department of Labor Wage and Hour Division, Since 2009, 1.7 million workers have collected $1.6 billion in back wages as a result of minimum wage and overtime violations. There is a potential for that trend to increase because of the regulation changes. Take steps now to ensure that you fully understand the changes and their potential impact on your business.
Debate continues over whether these changes will benefit workers as intended. Those in favor point to the fact that the share of full-time workers who qualify for overtime has fallen from 62% in 1975 to 7% today. Further, the salary exemption was originally included to protect employees from being given inflated job titles in order to avoid paying overtime. In 1975, $23,660 was 1.57 times the median wage. Today, it is lower than the poverty level for a family of 4 ($24,250).
Those opposed argue that the changes will hurt employees because employers will be forced to reduce base pay, cut hours, and hire more part time workers, which means that employees affected may end up with less take home pay. They also argue that employees who are moved from exempt to non-exempt status will lose flexibility as they are required to adhere to rigid schedules. Employee morale could also suffer because changing from exempt to non-exempt is often seen as a loss of workplace status. The controversy surrounding whether the rule changes will help or harm the majority of workers affected isn’t likely to end anytime soon. What do you think?