20 Jul Don’t Be Blindsided by the Obama Overtime Rules Changes
Published July, 2015
A standard workweek is typically thought of as 40 hours, though many employees spend much more time than that at work. Employees who work more than 40 hours a week must be paid overtime under the Fair Labor Standards Act unless they meet certain exemption criteria. In very general terms, 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 $455/week ($23,660/year).
- They perform certain job duties defined by the Fair Labor Standards Act. These duties are broken out into three categories: executive, professional, and administrative.
For example, a fast food restaurant manager who supervises three employees and earns $40,000/year is exempt from overtime pay under the executive exemption. Similarly, an accounting manager in a small office who is paid $35,000/year and doesn’t supervise any employees, but regularly uses his or her advanced knowledge in the field of accounting to perform his job duties, is exempt from overtime pay under the professional exemption. Finally, a human resources administrator who earns $45,000/year and regularly performs work that is non-manual and entails matters of significance is exempt from overtime pay under the administrative exemption.
Earlier this month, President Obama announced proposed regulations from the Department of Labor that would update the salary levels needed for executive, professional, and administrative employees to be exempt from overtime. The proposal raises the salary threshold from $455/week to approximately $970/week ($50,440/year) in 2016. It is estimated that these changes will affect 4.68 million workers in the first year alone. Essentially, employees who were previously exempt from overtime under the white collar exemption tests but earn less than $970/week will be eligible for overtime starting in 2016. Additionally, the proposed changes include an automatic escalator mechanism, which means that the threshold will automatically increase every year.
These changes are still in the proposal phase. After the public comment period, which ends on September 4, 2015, the Department of Labor will take the public comments into account and final regulations will be enacted. Employers should take steps now to prepare for the changes.
- 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, 1.5 million workers have collected $1.3 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 today’s threshold of $23,660 hasn’t been increased since 1975, a time when it covered 62% of American workers. Today, that threshold only protects 8%. 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?