Major Changes to Overtime Compensation Rules Expected

Raising the Stakes

By JOHN GANNON

John S. Gannon

John S. Gannon

The U.S. Department of Labor (DOL) recently proposed changes to the Fair Labor Standards Act (FLSA) that will impact payroll considerations for a majority of businesses across the country.

The changes will guarantee overtime pay for almost all employees making less than $50,440 per year in base rate pay, regardless of job duties or title. The changes are expected to take effect in early 2016.

FLSA Overtime Rules

Employees may be classified as exempt from the FLSA’s overtime compensation requirement — meaning they are not entitled to time-and-a-half when working more than 40 hours in a week — if they meet one of the FLSA’s exemptions.

The most commonly relied-upon exemptions are the ‘white collar’ exemptions, which apply to executive, administrative, professional, and outside sales employees. Exempt employees must meet the “primary duties” test for each exemption, and need to be paid at or above the minimum salary threshold, which is currently $23,660 per year ($455 per week).

There are narrow exceptions to the minimum salary threshold for certain professional employees and those working in outside sales. Other than those exceptions, employees who are paid less than the minimum salary threshold must be paid an overtime premium if they work more than 40 hours in a workweek. The FLSA also requires more rigorous record keeping when tracking the hours worked and compensation of non-exempt employees.

Minimum Salary Threshold Set to Double

Last month, the DOL released a proposed rule that would increase the annual minimum salary threshold to $50,440 ($970 per week) in 2016.

Businesses expected an increase in this salary threshold, although perhaps not to the $50,440 level. In March 2014, President Obama had directed the secretary of Labor to modernize the FLSA’s overtime rules for white-collar workers because those rules did not reflect the reality of the modern economy. According to the president, millions of Americans lack the protection of overtime compensation because of the outdated regulations.

The new minimum salary threshold represents the 40th percentile of weekly earnings for full-time salaried workers, according to data provided by the Bureau of Labor Statistics. In its proposed rule, the DOL explained that it has increased the salary level only seven times — in 1940, 1949, 1958, 1963, 1970, 1975, and 2004.

“The lapses between rulemakings have resulted in salary levels that are based on outdated salary data and thus ill-equipped to help employers assess which employees are unlikely to meet the duties tests for the exemptions,” according to the department.

The DOL estimates that almost 5 million workers will no longer qualify as exempt based on the new salary level. Notably, the DOL also proposes automatically updating to the minimum salary threshold annually so that it does not become outdated in a few years.

The DOL plans to publish a notice with the new salary level at least 60 days before the updated rates would become effective.

No Changes to Exempt Duties

The proposed rules do not alter any of the white-collar job duties, or otherwise change the exempt-duties tests. There was speculation that the duties tests would be modified to ensure that more managerial employees, in particular those who are ‘working supervisors,’ would be entitled to overtime. This did not happen; however, the DOL is soliciting questions from the public about how best to alter the duties tests.

Next Steps

Although these are only proposed changes, which must go through a public notice-and-comment rule-making process, we anticipate little if any changes to the new proposed minimum salary threshold. Those who are interested in submitting comments should visit www.regulations.gov and reference rule Identification Number 1235-AA11. The public has until Sept. 4 to comment.

Employers should start budgeting for these changes now. Some options include:

• Increasing base salaries to $50,440 for those employees who work any overtime, to preserve exempt status, with plans to increase incrementally every year. This is the easiest solution, but might not be in everyone’s 2016 budget;
• Keep salaries the same and start paying time and a half when employees making less than $50,440 work more than 40 hours a week. This is another quick fix, but could be problematic if you anticipate the employee will work a lot of overtime;
• Limit or eliminate overtime opportunities for employees earning less than $50,440. This option involves careful planning to be sure you have sufficient labor power to meet business demands. Employers who go this route may have to hire more workers; or
• Establish your employees’ current hourly rate, and reduce that rate in 2016, taking into consideration anticipated overtime costs. This option may net good results from a budgeting perspective, but will certainly impact employee morale.

If you need assistance planning for the FLSA overtime changes, contact employment counsel for guidance.

John S. Gannon is an associate with Skoler, Abbott &; Presser, P.C., and practices in the firm’s Springfield office. Since joining the firm in 2011, Gannon has defended employers against claims of discrimination, retaliation, harassment, wrongful-termination claims, as well as actions arising under the Family Medical Leave Act and wage-and-hour law. He also has experience with lawsuits seeking to enforce restrictive covenants and protect trade secrets; (413) 737-4753;jgannon@skoler-abbott.com

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