Preparing for New Overtime Rules
HR professionals need to be on top of the developments surrounding an overhaul to current white-collar exemptions under the Fair Labor Standards Act.
The U.S. Department of Labor proposed new rules in June that will significantly impact overtime under the FLSA. The regulations will modify certain provisions of the FLSA and, if finalized as proposed, more than double the salary threshold that determines which workers are eligible for time-and-a-half pay when working more than 40 hours a week.
President Obama called for the revamped regulations in March 2014, driven by a view that compensation paid to exempt employees had not kept up with inflation since the DOL last revised the regulations in 2004. In particular, the President noted that the $455 a week ($23,660 a year) salary threshold was below the poverty line for a family of four.
Under the DOL's proposal, the salary limit for workers eligible for overtime pay would increase from $23,660 a year to $50,400 a year, making millions of U.S. workers eligible for overtime who had previously been exempt from overtime pay. The DOL estimates that in the first year as many as 4.6 million workers would need to either be reclassified as non-exempt and paid overtime, or receive an increase in their salary to meet the new minimum threshold requirement. According to the White House, this will increase the incomes of 5 million workers while strengthening overtime protection for another 10 million.
Solicitor of Labor Patricia Smith recently announced that the final rule on overtime eligibility will be published in July 2016, with an effective date of 60 days later. These sweeping changes will affect businesses of all sizes and virtually every employee in the United States.
So, what can HR leaders do now to prepare?
Review and update job descriptions.
Though the DOL clearly proposed changes related to the salary threshold, it also indicated there may be changes to some parts of the duties test. In the past, exemptions were based on an evaluation of the duties an employee performs from day-to-day and whether those fall within the executive, professional or administrative exemptions. With the proposed rule, the DOL requested comments about a percentage threshold test when evaluating whether an employee's duties are primarily exempt or non-exempt in nature. What this means for employers is that they must be able to accurately describe what their employees do on a daily basis, and not just what is outlined in a job description. The risk of non-compliance is that an employee can claim that he/she has been misclassified and due overtime pay as back wages for up to the previous three years.
Understand employees' salaries and who is exempt.
It's critical to look at your employee base and start evaluating who of your employees falls within the gap between the current salary level of $23,660 and the proposed new threshold of $50,440. Part of this evaluation is to consider, if you do not increase these employees' pay, what that will mean in terms of potential overtime pay when these employees are reclassified as non-exempt. Employers need to note exactly how many hours per week each employee works and proactively monitor work hours with threshold reports or scheduling tools to manage overtime costs. Employers also need to ensure that any work exceeding 40 hours per week (or 8 hours per day in certain jurisdictions) is paid at the appropriate rate.
budgeting for increased salaries and overtime costs.
Though businesses will not have to comply with the new rules until late 2016, the coming months give employers time to start reworking their budgets to account for additional labor and staffing costs. In some cases, it may be more cost effective to raise the base salary of a currently overtime exempt employee to at least the exemption threshold than pay that employee overtime. Employers should also consider what that means for employees' managers as salary levels are compressed. Further, it's likely that some states will update their salary level threshold as well. If this occurs, covered employers must comply with the higher minimum salary requirement. Where federal, state or local laws differ, employers must follow the law that is more generous to the employee.
In the months ahead, HR professionals should examine their time and labor management systems and evaluate whether they are able to track the data needed to comply with the coming overtime changes. Despite the uncertainty of what the final rules might hold, employers have the benefit of time to assess their staffing, audit job titles, understand salaries and determine their exposure. The key is to act now.