Employers Plan for More Overtime Eligible Employees

You may have heard that the federal Department of Labor (DOL) issued a proposed rule on July 6, 2015 that will change one of the tests for determining which employees are exempt from overtime requirements and greatly expand the number of employees who must be paid overtime for any hours worked over 40 in a workweek. The major change is the proposal to significantly increase the minimum salary required to be paid to an employee who is an executive, administrative or professional ("white-collar") employee for them to be considered to be exempt from the overtime pay requirement. The current requirement is that these employees must be paid a guaranteed salary of at least $455 per week ($23,660 per year), while under the new rule, that salary threshold would increase to an estimated $970 per week ($50,440 per year) in 2016.

Proposed rules are not binding; however, and they are sometimes, but not always, changed following comments by interested parties. An astonishing 270,000+ comments were submitted to the U.S. Department of Labor in response to its proposal to increase by 53 percent the minimum salary required for employees to be exempt from most of the overtime pay provisions of the Fair Labor Standards Act. The DOL expects to publish final regulations later this year, so now is a good time to consider the potential impact of the new rules on your business and what your response should be to minimize their deleterious effect.

What Should Employers Do?

Before you can fully ascertain the impact these new rules may have on your business, you need to determine whether any of your exempt employees are going to lose that classification as a result of the rules changes. Consider taking the following steps between now and then to determine how your business will deal with the final rules once they are published:

Step One -- Review current job descriptions to ensure they are up-to-date and accurately reflect the duties performed by employees. Think about what operational changes need to happen as a result of the reclassification of employees from exempt to nonexempt status. For example, you may need to make changes to job duties, schedules, and/or staffing levels.

Step Two -- Review, but don't make changes to, positions that are currently classified as "exempt," particularly those with a salary between the current minimum salary threshold of $455/week and the proposed new salary threshold of $970/week.

Step Three -- Review current collective bargaining agreements, if applicable, for conditions that would change pay or benefits. Employers should be aware that employees reclassified as nonexempt under updated regulations may become part of the bargaining unit.

Step Four -- Evaluate compensation and total rewards options if it appears your organization may need to reclassify employees from exempt to nonexempt status. Consider too how employees may react to changes in being re-classified as non-exempt and figuring out how best to deal with those reactions which may be a significant undertaking. For employees who may be reclassified as hourly employees, understand now how many hours they are working per week and determine if you can cap overtime. For positions that often result in overtime pay, consider hiring more full-time, part-time and/or seasonal employees, or job restructuring to offset expansion of overtime pay.

Employers will struggle with how to accomplish this across an organization without significantly impacting their compensation budget or creating severe salary compression at the lower levels. This is of particular concern for employers that have many exempt administrators with relatively low salaries. While reclassifying some of these employees as non-exempt may be an option, others keep irregular hours or work significant overtime during at least certain portions of the year that make reclassification difficult. Both small and large employers will need significant lead time to decide how to deal with these issues.

Once you identify employees currently considered to be exempt from overtime, you can begin to plan for either maintaining the exempt status of those employees (by increasing salaries) or to communicate their new nonexempt status to employees who will no longer meet the salary requirements and consider the overtime issues that will arise. The new exemption rules may prompt some employers to look at other actions such as reductions in force, reorganization and consolidation of positions, or outsourcing certain functions to vendors. Any of these changes may require significant lead time to implement, so now is the time to begin considering your alternatives while you still have time to plan.

See Department of Labor (DOL) Proposed Rule "Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees." eginfo.gov, posted Fall 2015.

For a copy of the DOL's proposed regulations, please go to this link: http://www.gpo.gov/fdsys/pkg/FR-2015-07-06/pdf/2015-15464.pdf.

Although the proposed rule did not change the job duties requirements for any of the exempt job positions, the DOL did request comments on those rules as well. Therefore, the FLSA white collar exemption duty requirements could change in addition to the guaranteed salary rule after the final rule is published.

The information in this article should not be viewed as a substitute for the guidance and recommendations of a retained professional.

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