Today, May 18, 2016, the Department of Labor (DOL) finalized changes to the overtime regulations under the Fair Labor Standards Act (“FLSA”). This is not a “Chicken Little” moment; the rules are real and significantly impact the workers you currently classify as “exempt” from overtime. The changes are the most significant since 2004 and were previewed in July, 2015. Since the announcement of the proposed changes last summer, the DOL has reviewed approximately 270,000 public comments and made some changes to the rule initially proposed. The final regulations “update” overtime protections and “extend” them to more than 4.2 million more Americans. They are designed to provide overtime to more employees and affect primarily those now classified as exempt under the executive, administrative or professional overtime exemptions (the “white collar” exemptions). As with the existing regulations, there is no exemption for non-profits or small businesses. The new rules take effect on December 1, 2016, giving U.S. employers just over six months to assess the impact on their businesses and to make the necessary internal decisions and changes to ensure compliance.
What has changed?
- You may know that to be exempt from overtime under the white collar exemptions, a worker must both be paid a salary and meet certain exemptions based on their job duties. The most immediate and significant effect of the new changes is that the salary threshold for exempt workers will be increased from $455/week ($23,660/year) to $913/week ($47,476/ year). The change doubles the current threshold and is intended to serve as a more bright-line test for employers and employees to determine eligibility for overtime. This change will most likely be the most significant element for consideration in whether and how this affects your workforce.
- The salary threshold will automatically update every three years beginning January 1, 2020. The salary level has never before automatically updated. The DOL will publish the new thresholds at least 150 days prior to the effective date. It will be important to calendar this period every three years to anticipate and respond to the new salary levels.
- Non-discretionary bonuses and incentive payments (including commissions) may be counted toward as much as 10% of the standard salary threshold. However, to do so the non-discretionary payments must be made at least quarterly, or more frequently. If, after application of these payments, the employee does not meet the necessary salary threshold for the applicable time period, a “catch-up” payment is allowed. The catch-up payment must be made in the next pay period following the end of the quarter, or more frequent period selected; failure to do so will entitle the employee to overtime pay in that period. This has not previously been allowed to meet the salary threshold.
- In addition to the white collar exemptions, the regulations also affect the Highly Compensated Employee (“HCE Exemption”) salary threshold. The HCE Exemption salary threshold will increase from $100,000/year to $134,004/year. To be exempt as an HCE, the employee must receive at least the standard salary level of $913/week on a salary or fee basis; the remainder of the annual compensation may include commissions, nondiscretionary bonuses and other forms of nondiscretionary deferred compensation.
What do you need to do?
Take stock of your current policies:
- Audit your worker classifications, job descriptions and actual job duties.
- Audit your employee handbook to address overtime and related policies.
- Review your timekeeping mechanisms. The employer is required to maintain adequate time records to establish hours worked. Do you have a reliable system in place?
Identify employees who will be impacted and determine your response:
- Will you raise the employee’s salary to maintain the exemption or reclassify them as non-exempt as a result of the new rule?
- Will you need to decrease pay rate to account for overtime?
- Will you need to decrease hours worked to control overtime costs?
- Will you need to reassign duties to control overtime costs?
- Will you need to hire more workers, potentially at lower rates to control overtime costs?
Consider the impact of the reclassification:
- What changes will you need to make with the related systems such as time keeping and payroll processes, software and/or vendors?
- Formally salaried employees will need to be trained on keeping their time and will need to be managed to ensure compliance.
- Consider how this may affect job performance and morale. Employees who have enjoyed a certain level of autonomy as a result of being paid on a salary basis may have to adjust to the constraints associated with being an hourly worker. For example, flexibility in schedules may decrease with the need to budget or control overtime.
Consult Dean Mead’s Employment Law Team.
Dean Mead’s Employment Law Team stands ready to assist you with implementing the changes necessary to comply with the newly passed DOL regulations. Given the significance and complexity of these regulations, you will benefit from the assistance of our Team in ensuring you meet all criteria. Indeed, employment rules are complex and the potential financial impact of mistakes, particularly with overtime, is high. While legal assistance is particularly helpful in navigating these uncharted waters, the DOL’s numerous FAQs and assistance manuals available at dol.gov may also provide guidance. Putting the necessary resources into managing your workforce the right way will save time and money in the long-run. Our attorneys are excited to work with you and your business to map out your plan for continued future success.
About the Authors:
Nichole M. Mooney is a shareholder in Dean Mead’s Orlando office where she provides litigation advice and counseling, with an emphasis on issues affecting employment, for the firm’s for- profit and not-for-profit clients.
Melanie S. Griffin practices in Dean Mead’s litigation department, representing clients locally in Tampa and Orlando, statewide throughout Florida, throughout the southeast, and beyond. She advises and represents businesses of all sizes and types in commercial disputes and litigation including matters involving labor and employment.
 Of note, despite some speculation, there were no changes to the duties tests of the existing exemptions. In addition, the salary threshold does not apply to doctors, lawyers and teachers.