Employers need to be ready for new overtime rule by December 1

The flurry of speculation is finally over. The White House and the U.S. Department of Labor (DOL) have released the new final rule governing which workers must be paid overtime. The changes aren’t quite as drastic as what employers were preparing for based on the contents of the proposed rule made public last summer, but the final rule more than doubles the amount workers must earn to qualify as exempt from the law’s overtime pay requirement. 

The changes mean some 4.2 million more employees across the country, according to White House estimates, will be eligible to earn overtime pay when the new final rule takes effect on December 1.

Under the new rule, workers deemed exempt from the Fair Labor Standards Act (FLSA)—and therefore ineligible to collect overtime pay for any hours worked beyond 40 in a workweek—must earn at least $47,476 a year ($913 a week). That’s up from the $23,660 a year ($455 a week) threshold under the current rule. The $23,660 figure has been in place since 2004.

The new rule provides for automatic updates to the salary threshold. A White House fact sheet explains that the threshold will be automatically updated every three years and will be set at the 40th percentile of full-time salaried workers in the lowest income Census region (currently the South). That differs from language in the proposed rule, which said the threshold would be set at the 40th percentile of full-time salaried workers nationwide. The White House fact sheet says the revision is a result of public comments regarding regional variations in income.

In addition to meeting the salary test, workers classified as exempt also must meet the duties test, which means workers must perform executive, administrative, or professional work as their primary duty. Many had expected the new final rule to toughen that test to make even more employees eligible for overtime, which must be paid at a rate of at least one and one-half times an employee’s regular rate of pay. But the duties test provisions remain the same as in the old rule. Even with that concession, employers are in for big changes.

“The DOL tried to make the new rule less onerous—but barely,” said Burton J. Fishman, senior counsel with Fortney & Scott, LLC, in Washington, D.C. “Moving the effective date to December 1 will give employers more time to figure out what changes they need to make to maintain productivity and profitability.” In addition, Fishman noted:

• Reducing the cost-of-living adjustments to the salary threshold to once every three years will moderate some pressure on budgets and reduce wage compression in the short term;
• Since the DOL didn’t change the duties test, employers are relieved of making additional changes and adding additional time tracking; and
• Employers can use bonuses to meet up to 10 percent of the threshold amount, but the bonuses must be paid at least quarterly.

Reclassification opportunity

“The good news about this change is that, if the employer has some currently exempt workers who are perhaps wrongly classified because they don’t really meet the appropriate white-collar exemption, the new rules will offer that employer the opportunity to change the classification without raising red flags about the fact that the employer hasn’t been paying any overtime to the worker,” Susan Fentin, an attorney with Skoler, Abbott & Presser, P.C., in Springfield, Massachusetts, said of the new rule.

“So this is a great opportunity to fix job descriptions and reevaluate classifications overall to ensure that all the employees who are going to be considered exempt under the new regs will actually meet the applicable test for the exemption,” Fentin said.

Training, morale issues

The new rule means millions of employees currently classified as exempt but earning less than the new $47,476 threshold will have to either get a raise or be changed to nonexempt status. That’s likely to require training in timekeeping or a new way of tracking time, Fentin said.

“Some commentators have recommended that no nonexempt employees be allowed to work remotely because of the difficulty in ensuring that they are appropriately paid for all hours worked,” Fentin said. “If the currently exempt worker is used to having remote access, this could be a problem, both in terms of recording hours and in terms of making sure the work that he or she is responsible for actually gets done.”

Besides training formerly exempt employees on timekeeping, the new rule may present a morale problem, Fentin said. “Many [exempt] employees who get a salary see it as a mark of pride. Changing that employee to an hourly worker might adversely affect employee job satisfaction.”

Brent Siler, an attorney with Butler Snow LLP in Memphis, Tennessee, also expects training and timekeeping challenges. “It can be extremely difficult for an employee to remember that the e-mail or phone call he or she answered at home was actually work time and that the employee must submit a time adjustment request to get paid,” he said. “It can also be extremely difficult for newly nonexempt employees to learn to manage their time so that their work is completed in the 40 hours of the workweek.”

Siler said the new rule means employers should review worker classifications across the board, but at a minimum, they must determine whose status will change. Then, they should review their policies to make sure they have appropriate policies on time entry and overtime and language that prohibits improper deductions.

“Once they are comfortable with their policies, employers must train employees (especially those who have changed status) and management on what is required of them under the employer’s policies and the law,” Siler said, adding that he expects an increase in litigation because the FLSA and similar state laws “have long been a favorite” of the attorneys representing employees because “it is relatively easy to aggregate claims into collective or class actions, and the FLSA provides for attorneys’ fees for prevailing parties.”

Tareen Zafrullah, an attorney with Faegre Baker Daniels LLP in Indianapolis, also sees a training issue for employers since employees will need to understand the intricacies of “accurately recording and reporting all hours worked, what constitutes ‘hours worked,’ avoiding off-the-clock work, clocking out and in for unpaid breaks, and avoiding performing overtime work without prior approval.”

Zafrullah acknowledges a potential morale problem among some newly classified employees who see a switch from exempt to nonexempt as a loss of flexibility and prestige. He advises employers to remind those employees that they will receive overtime pay if they work more than 40 hours in a workweek. “The employer could also point out that classification as nonexempt does not mean the employer values the employee’s contribution to the organization any less; it simply reflects a change in legal requirements by the government.”

Reggie Gay, a shareholder with the McNair Law Firm in Greenville, South Carolina, also says some employees may see going from exempt to nonexempt as a type of demotion. He said an employee doesn’t have to go to an hourly basis and can remain on salary, but the employee will be entitled to overtime pay.

“Employers will have to explain the reason for the change and the need to record all time worked,” Gay said. “This may be difficult for many employees who have not had to keep track of their time.” In addition, after changes are made, employers will need to monitor the employees to be sure they are complying with the new rules, he said.

For more information on how the new overtime rule counts bonuses and incentive payments toward the threshold salary level and affects highly compensated employees, check out BLR Legal Editor Susan Prince’s summary at http://bit.ly/1THywrM.

To learn more about the implications of the DOL’s final overtime exemption rule, join us for the live expert-led webinar “DOL Overtime Exemption Rule Is Final: Key Compliance Deadlines, Impact on Duties Tests, and Immediate Action Items” May 26 or June 2. During this event, you will learn how to get your policies and practices in order by the final rule’s effective date. Your specific questions will be answered by our in-house editors and Washington insiders from the law firm of Fortney & Scott, LLC. To register, visit http://store.blr.com/dol-ot-exemption-rule.