- Surviving the Overtime Changes
- August 30, 2016 | Author: Joanne P Rinardo
- Law Firm: Deutsch Kerrigan LLP - New Orleans Office
An update by President Obama and the Department of Labor has redefined who will be eligible for overtime pay under rules issued by the Obama administration.
Some employers have operated under the incorrect belief that if an individual was “salaried,” he or she was exempt from overtime. However, under federal law, exemption status is determined by both the employee’s job duties and salary, rather than how the employee is paid.
The “white-collared” categories of jobs—Administrative, Executive, and Professional— are generally exempt from overtime pay. With only a few exceptions, to fall into one of these three categories, an employee must perform certain duties and/or have certain responsibilities (the “duties tests”) and make a minimum weekly wage that is paid on a salary or fee basis (the “salary test”). The Department of Labor (DOL) has raised the threshold for the salary test for exempt status. The duties test remains unchanged.
The salary threshold increase will impact 4.2 million U.S. workers out of the 22.5 million who are currently exempt. Of that 4.2 million, the change will have a greater impact on employees who do not have a college degree, and who are under 35 years of age, female, and non-white. It is also expected that the changes will impact some trades, i.e., the service industry, construction, and retailers, more than others.
- Effective December 1, 2016, the threshold for the salary test will increase to at least $913 weekly ($47,476 annually). This is a significant jump from the prior $455 weekly wage requirement and is based on 35 percent of average weekly earnings.
- Employees may use commissions and non-discretionary bonuses paid at least quarterly to satisfy up to 10 percent of the new salary threshold.
- There is no requirement to convert employees from salaried to hourly in order to calculate overtime pay. However, employers will be required to track the time of any non-exempt employees, irrespective of how they are paid.
- The DOL will increase the salary threshold every three years. It is expected that the threshold will be raised in 2020 to more than $51,000.
- Those professionals who were exempt from the salary test, such as doctors and teachers, will remain so, and are not entitled to overtime regardless of their salary.
- The highly compensated employee’s salary threshold for exemption will be raised to $134,000 from $100,000. As under the old rules, to qualify for this exemption, the employee must still perform “office or non-manual work” and must still “customarily and regularly perform” any one of the exempt duties of an executive, administrative, or professional employee.
Employers must decide how to classify those employees who are currently exempt but who make less than the new threshold. Some options for addressing the threshold change include:
- For those employees close to the new threshold, you may decide to raise the salary to keep the employee’s status as “exempt.” Keep in mind that in three years, that threshold will be raised again.
- For other employees, you may elect to disallow overtime. If so, you must put into place a system to track all hours and make your expectations known to the employees in writing.
- For employees well below the threshold who do not consistently work overtime, paying the occasional overtime may be the better economic approach.
- You may decide to reduce the hourly base rate so that, when overtime is added, weekly compensation remains unchanged. This approach may result in decreased morale or resignations of critical employees.
Failure to comply with the new regulations could result in expensive litigation or the class action suits we have seen in the past. Note: it is helpful to have a written safe harbor directive that employees must immediately report any overtime pay errors.
As mentioned above, one important result of the rule change is that employers will now have to monitor the hours worked by previously exempt employees whose wages remain below the new threshold. This will be trickier for those employees who work from home. Simply having a policy that the employee must not work more than 40 hours weekly will not relieve the employer of monitoring the time the telecommuting employee works.
If you do not wish to pay overtime to the telecommuting employee, you must (1) limit and communicate the amount of hours that the employee may work on a weekly basis, (2) have a system to track accurately every hour worked from home, and (3) have the employee acknowledge in writing the hours worked weekly. Taking these steps should avoid a situation in which the employee underreports his or her hours, but later presents a claim for work done “off the clock” at overtime rates.
Some managerial and/or administrative applicants may see their new status as a non-exempt hourly employee less desirable because they will have to “punch a clock” and have less flexibility. On the other hand, some employees will welcome not having to work excessive hours for lower-than-expected pay. How you present the job will impact your ability to fill these critical positions. You might also consider changing how benefits, such as vacation, are accrued by these employees if non-exempt employees are usually treated differently.
The new overtime rules the Obama administration issued could mean thicker paychecksfor some Americans who work longer hours or just reduced time on the job. What it will mean is that employers will have to adapt new technologies to track their employee’s time and decide how they classify their employees.