White Paper
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OVERTIME CHANGES FROM THE DEPARTMENT OF LABOR

March 31, 2016

In case you haven’t heard, on May 17, 2016, the U.S. Department of Labor (DOL) published colossal changes to the overtime rule that will make approximately over 4 million currently exempt employees eligible for overtime pay later this year!

Although it was kept a bit on the “down low” without much media attention, on June 30, 2015, the United States Department of Labor (DOL) released proposed regulations that would modify certain provisions of the Fair Labor Standards Act (FLSA). Specifically, the proposed regulations increase the minimum salary required to be earned by an employee in order for that employee to be exempt from the FLSA overtime requirements. The DOL issued a Notice of Proposed Rule Making (NPRM) entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.”

Without further ado, we will review for you the highlights of the final rule, but first let’s review what the current law entails.

What is current law?

The FLSA by and large requires covered employers to pay their employees at least the federal minimum wage (currently $7.25 an hour) for all hours worked, and overtime premium pay of one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek. However, there are a number of exemptions from the FLSA’s minimum wage and overtime requirements. Specifically the FLSA exempts from both minimum wage and overtime protection “any employee employed in a bona fide executive, administrative, professional capacity, or in the capacity of outside salesman.” The FLSA does not define the terms “executive,” “administrative,” “professional,” or “outside salesman.”

Since 1940, the regulations have commonly required each of the following three tests to be met for the exemptions to apply:

1)the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”).

2)the amount of salary paid must meet a minimum specified amount (the “salary level test”)
  Since 2004, the regulations stipulate that, any employee earning less than $455 per week ($23,660 a year) is a “nonexempt” employee.
  Under the FLSA, a nonexempt employee is entitled to overtime pay when working over 40 hours in a workweek regardless of whether the employee is paid on an hourly or salary basis.

3)the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).

What changes do you have to comply with by December 1, 2016?
The minimum salary needed to preserve most exemptions (in addition to meeting the proper duties test) will rise from $23,660 to $47,476 per year which is actually lower than expected, based on the proposed regulation.
Workers who earn up to $47,476 a year ($913 a week) will have to be paid overtime, even if they're classified as a manager or professional.
The minimum salary needed to preserve the Highly Compensated Employee (HCE) exemption will rise from $100,000 to $134,004 per year.
The minimum salary will reset every three years, starting on January 1, 2020. The new minimum will be announced 150 days in advance (on August 1, 2019 for the January 2020 increase). Based on current projections, the salary threshold is expected to rise to more than $51,000 with its first update.
Those minimum salary levels are tied to a percentage of the earnings of full-time salaried workers in the lowest-earning Census region, the South, which is comprised of AR, LA, OK, TX, AL, KY, MS, TN, DE, DC, FL, GA, MD, NC, SC, VA and WV.
Up to 10% of the salary minimum for non-HCE workers can be met via payment of non-discretionary bonuses, commissions or incentive pay so long as the payments are made quarterly or more frequently.
No changes were made to any of the duties tests.

What should you as an Employer do?

To avoid unfavorable actions and law suits, Human Resource Professionals and business owners will need to take some steps to avoid common FLSA pitfalls. It will be necessary for employers to promptly analyze the impact the final rule will have on each employee and determine how it will respond to the new rules by increasing salaries of those properly classified as executive, administrative, or professional to meet new salary level, paying more overtime, limiting overtime hours, or reducing base salary to compensate for overtime hours while still paying the hourly minimum wage.

Employers should consider the following actions:

First, identify exempt positions where employees earn less than $50,000.
Next, review those job classifications and your compensation levels and make some decisions. Decide for which positions you will increase the salaries above the new salary level.
For those employees likely to be reclassified, you will need to review the following:
What tasks those individuals perform on a weekly basis and how many hours they usually work?
What job duties can be redistributed or eliminated?

Can an entire function can be outsourced?
Also consider whether benefits will change for workers moving from exempt to nonexempt.
Once decided, you will need to decide how and when to notify the employees that will be effected.
Policies and procedures will need updating and plan on educating newly nonexempt workers and their managers on unfamiliar topics such as proper record-keeping, compensability of travel time and more.

Stepped Up Enforcement from DOL?
Around 90 percent of employment class actions are related to wage and hour issues. The U.S. Department of Labor (DOL) estimates that as many as 70 percent of employers aren’t in compliance with the FLSA in some material way. Under the Obama administration, Secretary of Labor Thomas Perez and Wage and Hour Division Administrator David Weil have been committed to stepped-up enforcement.

The financial consequences of FLSA violations can be extensive and include:

Amount of unpaid overtime for the past two to three years, depending on the statute of limitations.
Fines, interest and possible criminal sanctions.
Attorney fees for prevailing employees’ attorneys which can amount to millions of dollars.

References:

https://www.dol.gov/whd/overtime/final2016/
https://www.shrm.org
Full Regulation: https://www.dol.gov/sites/default/files/overtime-overview.pdf

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