Now that the U.S. Department of Labor (DOL) has proposed a new rule affecting overtime eligibility—a rule that is more likely to be implemented than the department’s previous attempt—it’s time for employers to begin studying how they classify their employees so they’ll know whether pay raises or classification changes will be in order when a final version of the new rule goes into effect.
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On March 7, the DOL announced a new Notice of Proposed Rulemaking that would increase the salary threshold for employees eligible to collect time-and-a-half pay for hours worked over 40 in a workweek. Under the new proposal, exempt employees would have to earn at least $679 a week ($35,308 a year) to be classified as exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). That’s up from the current level in which employees must earn at least $455 a week ($23,660 a year), the threshold that has been in place since 2004.
In addition to meeting the “salary test,” exempt employees must meet the “duties test,” meaning they must perform work that is executive, administrative, or professional in nature.
The new proposed rule follows a 2016 attempt by the Obama administration to change the salary test. That proposal called for a salary threshold of $913 a week ($47,476 a year). A federal district judge in Texas struck down that rule before it was to have taken effect on December 1, 2016.
Kara Shea, an attorney with Butler Snow LLP in Nashville, Tennessee, says she’s heard from some of her clients that they don’t have any nonexempt employees making less than the proposed salary threshold, but the new proposal may still have an impact on restaurants and other service industries as well as nonprofits.
The new rule will be up for public comment for 60 days and could be revised or even challenged in court again, but since it calls for a far less drastic change than the previous proposal, it is seen as likely to take effect.
Check Current Classifications
With a new rule on the way, it’s time for employers to gather information as a first step in the decision-making process. If they have employees currently classified as exempt—and therefore not eligible for overtime pay—but making less than $679 a week, employers need to determine whether they will change their classification to nonexempt or raise their pay above the overtime threshold. But pay isn’t the only consideration.
“Increasing pay will not be enough if the employee is not performing exempt job duties,” says Shea, coeditor of Tennessee Employment Law Letter. “Employers should first make sure the employees are correctly classified to begin with, based on job duties, before they decide whether to preserve the exemption by raising pay.”
Since exempt employees need to meet not just the salary test but also the duties test, it’s important for employers to be able to demonstrate that an employee’s job duties truly are executive, administrative, or professional or that the individual works in outside sales or certain computer-related occupations.
A close examination of the duties performed by exempt employees who make less than the proposed new salary threshold often doesn’t justify the exemption, Shea says. “For this category of employees, in this pay range, I think there is a lot of risk these folks should not be classified as exempt to begin with based on their level of authority and responsibility and nature of their job duties,” she says.
If employers decide to reclassify currently exempt employees to nonexempt, they face a training issue, since exempt employees won’t be used to keeping track of their time. “They must be trained, and the training must be reinforced with monitoring and supervision of timekeeping, particularly during the early stages of the transition,” Shea says.
More Considerations
Another issue to consider is that some employers condition certain benefits on being “salaried,” so employers will need to determine how reclassification might affect formerly exempt employees’ eligibility for benefits, Shea says. She also notes that some employers that began researching how to comply with the previous proposed rule that was struck down in federal court found that their lower-level exempt salaried employees actually were working less than 40 hours a week.
“So, if these employees are changed to hourly status based on the assumption of a 40-hour workweek, in order to make the same pay as they made as salaried employees, they are going to need to work more,” Shea says. “On the other hand, some exempt employees are working well over 40 hours, and employers who switch those personnel to nonexempt status need to think about ways to control those costs while achieving the same level of productivity but also making sure no time is worked off the clock.”
Some employees currently classified exempt might welcome a switch to nonexempt to make them eligible for time-and-a-half overtime pay. Others might resent the change, thinking it takes away some of their flexibility and prestige. Such feelings present a communications challenge, Shea says.
“I think the emphasis needs to be on the fact that classification is not a matter of preference or a voluntary choice by either the employer or the employee,” Shea says. “Employers are not making this change to insult or hassle employees—they have no choice.”
What to Do Now
Shea says it’s time to begin researching and planning, but she doesn’t suggest reclassifying anyone yet. “This proposal is not final yet and may be modified or subject to legal challenges,” she says.
“When the final rule is published, a deadline for compliance will be included,” Shea says. “Last time, employers got several months’ grace period to comply, and I expect a similar grace period this time.”
To learn more about these important changes, register now for a 60-minute webinar, “DOL’s New Overtime Exemption Rule: How to Prepare Now for $35,308 Minimum Salary Basis,” to be held on March 26, starting at 2:00 p.m. Eastern, 11:00 a.m. Pacific. The presenters will be employment law attorneys Burton Fishman and Juanita Beecher with Fortney & Scott, LLC, in Washington, D.C.
Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.