Department of Labor Releases New Overtime Rules
On May 18, 2016, the Department of Labor issued much-anticipated changes to FLSA overtime regulations. The following are a few of the key amendments that go into effect December 1, 2016:
- Increased Minimum Salary Thresholds. The rule raises the minimum salary level to $47,476 per year ($913 per week). It also raises the Highly Compensated Employee (HCE) salary level from $100,000 to $134,004 ($2,577 per week). Employees must meet these minimum thresholds to be considered as an exempt employee.
- Automatic Minimum Salary Updates. Starting on January 1, 2020, the minimum salary levels will recalibrate automatically every three years to account for wage growth. The DOL estimates these thresholds will rise to roughly $51,000 and $147,500 in 2020. It will publish advance notice of the new levels in the Federal Register and on its website, at least 150 days before they go into effect.
- Bonus and Incentive Payments. The new rule allows up to 10 percent of a non-HCE’s salary threshold to be met by commissions and other non-discretionary payments (compensation typically tied to performance or profitability) if the payments are made at least quarterly. It permits the employer to make one “catch up” payment in the next payroll after the end of the quarter, if necessary, to maintain an employee’s exempt status.
Notably, the rule does not alter the DOL’s “duties test” for determining whether an employee’s job duties are “white collar” and thus eligible for exempt status. Thus, keep in mind that even if an employee meets the minimum salary level, he or she still must perform “white collar” duties.
What Should Employers Do Now?
Employers with now-exempt employees who no longer meet the minimum salary level face a choice between raising salaries or reclassifying those employees as non-exempt. However, reclassifications can be managed in several ways to minimize the impact on the business. To partially or wholly offset overtime costs, employers could adjust compensation downward based on projected overtime costs, limit workers to 40 hours per week, and/or hire more workers as necessary to eliminate need for overtime work.
Each option has pros and cons, but all employers at least should take the following steps by December 1, 2016:
- Assess positions currently classified as exempt to determine whether they are, in fact, exempt and, if so, whether they will remain exempt under the new minimum salary levels.
- Decide how to address currently-exempt positions that fail to satisfy the new minimum salary thresholds.
- Consider auditing the job descriptions and actual duties for all positions (especially those classified as exempt) to ensure the “duties” test can be met for all employees currently classified as exempt.
In addition, the new rules will also likely present personnel challenges. Reclassified employees may view the conversion to non-exempt status as a demotion – especially if they are now required to punch a clock (track time), given inflexible work hours, or rendered newly-ineligible for certain perks and bonuses.
However, the DOL reiterates that non-exempt employees are not required to “punch a clock,” as long as the employer retains certain records tracking their hours. For employees on a fixed schedule, employers may use the schedule as a baseline and indicate changes to the extent actual hours worked vary from the schedule. For employees on a flexible schedule, employers may record total hours worked daily (but need not record when, during the day, those hours were worked).
That said, there likely will be some devils in the details. Employers will need to review the FLSA regulations and its own workforce and infrastructure to determine the best system for managing reclassifications and tracking nonexempt employees’ working hours. Employers also should consider whether the new rule impacts other policies requiring differentiation between exempt and non-exempt employees. For example, travel time pay requirements for non-exempt employees may reduce travel opportunities for newly reclassified employees.
In sum, the new DOL rules substantially increase minimum salary levels, which will then increase every three years. Employers should take steps now to ensure compliance with the new regulations by December 1.