On March 15, 2016, the U.S. Department of Labor (DOL) sent the proposed final overtime regulations to the Office of Management and Budget (OMB) for review, marking the final step in the process before the new regulations are published. The OMB review can take anywhere from 30 to 60 days, with an estimated publication date in April or May. Based on comments made by Department of Labor Solicitor Patricia Smith earlier this year, the regulations will become effective at least 60 days after the publication. Thus, if the regulations are published and become effective as anticipated, employers could be expected to comply with the new changes as early as mid-June. Given this short timetable for compliance, employers should be proactive and begin and/or continue their planning for the changes as soon as possible.
It is important to note that the Congressional Review Act gives Congress 60 legislative days to review the final regulations once published. Congress could nullify the regulations, but that decision is subject to presidential veto and a possible veto override by a two-thirds vote. Publishing the final regulations by mid-May would leave room for President Obama to veto any decision made by the current Congress, and for any veto override by a two-thirds vote to take place. If the final regulations are published beyond mid-May, that could delay the congressional review until 2017, when there will be a new administration that may or may not be supportive of the changes. It is unlikely this would occur.
What is changing?
The specific changes to the overtime rules will be clear when the final regulations are published in the Federal Register after the OMB review. However, considering the Proposed Rule published in July 2015, employers should expect the following: the “white-collar” salary threshold for exempt status to increase from the current $23,660 a year to as much as $50,440 a year; the “highly compensated” salary threshold for exempt status to increase from the current $100,000 a year to at least $122,148 a year; and a mandatory annual increase in the thresholds going forward to keep up with inflation.
What can employers do to prepare?
Employers should be proactive and begin planning now. Taking the following actions will assist
employers in assessing the potential impact of the changes on their businesses and give them time to prime their workforces and internal operations for the effects:
- Employers should review their current exempt positions and determine which positions may be reclassified as non-exempt under the expected 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 overtime once the regulations go into effect.
- 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.
- Bonus plans should be evaluated. The new regulations may allow for a non-discretionary bonus 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.
- The new regulations, and anticipated mandatory annual increases in the salary thresholds, will most certainly impact employers’ 2016 budgets and post-2016 budgets, requiring employers to review their budgets carefully and plan accordingly.
Given the far-reaching effects of the expected final overtime regulations and the short timetable for compliance, it is important for employers to take steps now 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 SHRR.