Prepare for the worst, hope for the best.
New overtime regulations
In 2014, President Obama signed a Presidential Memorandum instructing the Secretary of Labor “to propose revisions to modernize and streamline the existing overtime regulations.” The Presidential Memorandum went as far as to state the “regulations regarding exemptions from the [Fair Labor Standards] Act’s overtime requirement, particularly for executive, administrative, and professional employees…have not kept up with our modern economy.”
On May 18, 2016, President Obama and Secretary Perez announced the Department of Labor’s (Labor Department or DOL) final rule updating overtime eligibility regulations, which will extend overtime pay protections to more than 4 million workers and cost private employers $1.8 billion in the first year of implementation, the Labor Department estimates.
While there are no changes to the “duties test” to qualify for the executive, administrative, and professional employee exemptions, the new overtime regulations include the following updates:
- Employees who earn less than $913 per week (or $47,476 annually) will now generally be eligible for overtime pay. The old minimum threshold was $23,660 annually.
- The salary threshold will automatically update every three years, reaching more than $51,000 in January 2020 by Labor Department estimates.
- Bonuses and commissions can satisfy up to 10% of the new salary level.
The new overtime regulations were set to become effective December 1, 2016. However, on September 28, 2016, the House voted and passed a bill (H.R. 6094) that delays the effective date to June 1, 2017. With Congress adjourned until mid-November, the Senate will have very little time to vote during its lame duck session on the bill. Even if it passes through the Senate, most expect President Obama to veto the act, thus putting the December 1, 2016 date back in to effect.
Hundreds of thousands of organizations nationwide are scrambling to figure out how to comply with the new overtime regulations. Employers have a few basic options for adjusting their pay practices, according to the Labor Department:
- Increase employees’ salaries to above $47,476 to keep them exempt from overtime.
- Reclassify positions that pay between $23,660 and $47,476 from exempt to nonexempt, and pay employees in those positions overtime when they work more than 40 hours a week.
- Restructure the workforce or particular jobs. This might include removing some duties from a group of employees so that they can complete their work in 40 hours a week and transferring those duties to another group who have had their salaries increased to remain exempt.
To make the best decision possible for your organization, it is important to ensure that the cost estimates for any scenarios that are being considered are as precise as possible. Accurately predicting and controlling overtime hours will be particularly important if exempt employees are changed to nonexempt.
Is your company ready for this change? Questions and ideas to consider:
- Do you have your list of potentially affected employees: classified as “exempt” and paid less than $47,476 annually?
- Have you compared the cost of increasing their salaries to the new minimum with the cost of keeping their salaries where they are and paying overtime? If they work less than 40 hours a week with a large gap between their salary and $47,476, reclassify them as non-exempt and keep them under 40 hours/week. If they normally work in excess of 40 hours per week, maintain their exempt status by raising salary to $47,476.
- If you raise their salaries to the new minimum, have you considered whether you still have a “duties test” risk? Make sure that job descriptions reflect duties and responsibilities that correlate to the classification (exempt or nonexempt).
- Will you take advantage of the provisions under the new rule to use bonuses, commissions, or other incentive compensation as a credit toward the new salary threshold? Do affected employees receive a bonus or other variable non-discretionary earnings that can count for up to 10% of salary?
- The new overtime rules may affect other employment policies, programs, and practices that are directly or indirectly tied to an employee’s exempt/nonexempt status. If you reclassify employees to overtime-eligible, are your supervisors ready to manage the associated overtime costs? Do they understand what kinds of hours are considered “hours worked” (e.g., certain travel time, time spent working from home or remotely, time spent using technology for business purposes, etc.)?
- In addition to policy impact, and while it’s critical to focus on complying with the new overtime rules, it’s also important to keep things in perspective from a compensation management standpoint. For instance, raising pay for some employees to meet the new exempt salary threshold of $47,476 may fix one problem but create another – pay compression. Since the exempt salary threshold will more than double from the current $23,660, some employees could end up being paid the same as or more than their supervisors. Similarly, salaries for newly-hired employees could exceed those of employees with more tenure and proven performance. If so, it may be time to update or redesign pay ranges and compensation programs.
- If jobs are reclassified, remember to update FLSA status on job descriptions (you should have these already!) and job postings in addition to your payroll and HRIS systems.
- How will reclassified employees respond? Many employers are concerned this will hurt employee morale by taking away their flexibility, and that moving them from salaried positions to nonexempt status will be perceived as less prestigious and as a “demotion.”
Practical strategies in approaching implementation of new overtime rules
- To avoid increased costs due to the new rules, employers can reduce the base pay of employees so the added costs of paying for overtime could be offset – resulting in about the same take-home pay for employees. In this scenario, the costs of increased overtime coverage would ultimately be borne by workers as employers set base wages taking expected overtime pay into account. Consider how decreasing compensation could affect employee morale, and what would happen if the overtime hours dry up.
- Middle managers who are properly classified as exempt will be impacted as many of them fall below the new $47,476 threshold. The majority of companies are focusing on their mid-level management for salary increases. Most employers rely on these employees to work more than 40 hours and, in most cases, their salary is near enough the new threshold that it makes more financial sense to increase the annual salary and keep the employee as exempt, but make sure they make at least $47,476.
- December 1, 2016 is a Thursday and will likely not coincide with your organization’s payroll cycle. However, you will want to ensure you make any exempt/nonexempt status changes no later than the payroll cycle that includes Thursday, December 1, 2016.
- It’s wise to communicate with employees on how they will – or will not – be affected by the new overtime pay rules. Use this opportunity not only to communicate about the overtime changes that lie ahead, but also to highlight the strengths of your pay program. Communicate salary increases to employees who will be receiving them and explain why. Tell employees whose status is changing from exempt to nonexempt the reason for the change and what it means to them. Talk to them about changes they may see in their paychecks and in their everyday work lives, such as newly restricted work hours and requirements to record hours. It’s always good practice to notify employees well in advance of any changes in their pay.
Recent Development: Lawsuits Filed to Challenge New Overtime Rules
In late September 2016, two separate lawsuits were filed to challenge the new rule regarding overtime pay. One lawsuit is led by Texas Attorney General Ken Paxton and Nevada Attorney General Adam Laxalt. They are joined by 19 other states, including Ohio, Kentucky and Indiana, in their assertion that the DOL violated the Constitution by exceeding its authority in crafting the rule. The other lawsuit challenging the rule comes from a coalition of more than 50 business organizations and is being led by the National Federation of Independent Businesses and the U.S. Chamber of Commerce. Many of the objections regarding the constitutionality of the rule are similar in both lawsuits, both filed in the U.S. District Court for the Eastern District of Texas.
Even with the recent act passed by the House, businesses should continue to prepare for the overtime rules as though there were no legal challenges, as they are far from certain to succeed. The rules as of now are still set to take effect December 1, 2016.