The U.S. Department of Labor published the final overtime regulations on Tuesday, May 17. The regulations are different than anticipated in several respects, including the new salary threshold amount and the deadline for compliance. Although the changes are less drastic than expected, they are still significant. The exempt status of millions of workers will be directly impacted. Thus, employers should be aware of the changes and be ready to comply.
What has changed?
Generally, employees are exempt from being paid overtime if they meet certain tests regarding their job duties and are paid on a salary basis, with salaries that meet a certain threshold and are not reduced due to quality or quantity of their work. If the salaries paid are high enough, the employees are considered “highly compensated” and their duties tests for exempt status are more relaxed. The new regulations do not modify the duties tests. However, they do significantly change the salary basis requirement:
- The new minimum salary threshold will be $913 per week (or $47,476 per year). This is up from the current $455 per week (or $23,660 per year). Thus, if your employees are not making at least $913 per week, they cannot be classified as exempt and are entitled to overtime.
- The minimum salary threshold will be adjusted every three years, based on the 40th percentile of the lowest-wage census region of salaried employees. This indexing could result in the reclassification of employees every three years.
- The salary threshold for the highly compensated employee rule will be $134,004. This is up from the current $100,000 threshold. Thus, if your employees are not making at least $134,004 per year, they must meet the more stringent duties tests to qualify for exemption.
- The salary threshold for highly compensated employees will be adjusted every three years, based on the 90th percentile of all U.S. salaried workers. This indexing could also result in the reclassification of highly compensated employees every three years.
- Up to 10 percent of the salary threshold can be satisfied by the payment of non-discretionary bonuses or incentive payments (including commissions) paid quarterly or more frequently.
When are the changes effective?
The new regulations provide more time for employers to comply than previously expected. The new changes will go into effect on December 1, 2016. Thus, employers have around 200 days to prepare.
What can employers do to prepare?
Now that the regulations are published, employers should take action to ensure compliance as of December 1, 2016:
- Employers should review their current exempt positions and determine which positions will be reclassified as non-exempt under the new regulations.
- For the positions requiring reclassification, employers should determine whether they want to maintain the exempt status and increase the position salary to meet the new threshold, or whether they will reclassify the position as non-exempt and pay the employee an hourly wage, subject to overtime rules. In order to make this decision, employers can track time to identify appropriate hourly wages for the positions. Tracking time will help employers accurately budget for the new overtime obligations.
- Bonus plans should be evaluated as the new regulations allow for a portion of non-discretionary bonuses or commissions to be factored into the employee’s salary to meet the required threshold amount. Additionally, employers will need to determine whether the reclassification of former exempt-status employees will affect eligibility for bonuses.
- Once any reclassification decisions have been made, employers should communicate with employees and explain why certain positions will no longer be exempt status in consideration of affected employees’ possible morale issues.
- Supervisors will need to be trained on the management of newly reclassified employees and other reclassification issues such as schedule management and timekeeping.
- Newly reclassified non-exempt employees will need to be trained on timekeeping, overtime authorization rules, and working only during designated hours (e.g. no working during lunch periods or breaks and no off-the-clock working on smart phones, etc.).
- Employers will need to determine whether reclassification will affect any current exempt-status employees subject to a collective bargaining agreement. Employers should advise union business representatives of reclassifications, understanding this may require re-opening of negotiations.
Given the far-reaching effects of the final overtime regulations, it is important for employers to take steps to mitigate their exposure to potential liability associated with misclassification and failure to pay overtime. The liability for misclassification of employees can be very expensive for employers, including back wages plus overtime pay on all hours worked over 40 hours per work week for each misclassified employee for a period of 2 years (or 3 years if the employer’s mistake is found to have been willful), fees penalties, and attorney fees’ and costs. As a result, employers should consult their employment law counsel to help expedite the process and ensure compliance.
For more information about preparing for the new FLSA overtime rules, please contact Janis Adams at email@example.com or Lindsay Raymond at firstname.lastname@example.org.