The New OT Regulations:
Why the government felt they were necessary, options for your employees who will become non-exempt, and what employers should do now.
This is a summary of remarks made August 27, 2015 by Nyemaster attorneys Frank Harty, Katie Graham, and Tom Cunningham on the anticipated changes to the Fair Labor Standards Act (FLSA). Final draft regulations are expected to be published later this year, and following a waiting period that could vary from 30 to 120 days, the draft rules will go into effect.
The biggest change to the rule involves the salary level test for determining whether an employee meets the Executive, Administrative, or Professional (EAP) exemption from minimum-wage and overtime protections. To be exempt, an employee must be paid on a salary basis, earn a minimum salary level, and primarily perform duties that are executive, administrative, or professional as defined by regulations. Currently, an employee must earn at least $455 per week or $23,660 per year to be considered under the exception. Under the new regulations, that number is anticipated to more than double to $970 per week or $50,440 per year. The new rules are also likely to increase the salary-level test for highly compensated employees from $100,000 to $122,148. Special rules will continue to apply in certain industries including IT, outside sales, and teaching.
Why Such A Dramatic Increase in the Number of Workers Subject to Overtime?
The increase is due largely to the Department of Labor’s (DOL) failure to update the salary level on a regular basis in recent years. The FLSA was enacted in 1938 and the salary-level test has only been updated seven times. The most recent update was in 2004 and the DOL has stated the update was inaccurate because it drew on employment statistics that were not comprehensive. The new rule will likely provide for automatic updates going forward at an interval to be determined.
The DOL has also asked for comment on whether it should limit the amount of non-exempt work an exempt employee may perform and whether other changes to the primary-duties test need to be considered. The DOL referenced the California rule, which caps the amount of non-exempt work for exempt employees to 50 percent of their weekly hours. It is unclear whether such a limitation will be imposed, and there has been significant pushback from employers concerned about substantial business-model disruption.
What Employers Can Do Now
There are a number of options employers can take with respect to employees who will need to be reclassified as non-exempt and who work overtime, including:
- Paying overtime hours at the current rate;
- Reducing the current rate so that compensation will be similar after paying overtime hours;
- Eliminating overtime;
- Increasing salaries to the minimum threshold to maintain exempt status; or
- Some combination of the above.
Possible Traps and Trip Points
Hidden or undiscovered overtime is a logistical issue. Employers should begin now to track and analyze the amount of hours actually worked by exempt employees who may be reclassified after the new rules go into effect.
Employers may need to cap or eliminate remote access and work performed on mobile devices outside regular working hours to avoid overtime.
If employers want to reduce an employee’s base rate to allow for overtime without dramatically increasing overall compensation, they must be careful not to drop below the applicable minimum wage rate.
Private employers should not attempt to pay overtime in the form of compensatory time off (“comp time”), which is prohibited in the private sector.
Non-discretionary bonuses may count toward satisfying the salary-level test, but the DOL is likely to limit the amount of such bonuses that can be used to do so, in relation to the salary being paid.
How the New Rules Benefit Employers
It presents an excellent opportunity to review job duties and descriptions and ensure proper classification of all employees. The inclusion of automatic salary-level updates will also provide clarity and avoid future “sticker shock.”
Questions and Help
If you have questions about implementing the new rules, Nyemaster’s Labor & Employment attorneys are available to assist, and can also perform a confidential and privileged audit to ensure compliance.