A Wrinkle in Overtime

Background

Overtime regulations were first implemented as part of the original Fair Labor Standards Act (FLSA) in 1938 to provide minimum protections to American workers.  Although the FLSA deals with worker compensation, it has not been regularly updated, a fact that has drawn the attention of the Obama Administration.  Accordingly, last year the DOL issued a Notice of Proposed Rulemaking, in which it proposed significant changes to the FLSA, with the inten-tion to carry out those changes by January 1, 2016.  The sweeping changes were immed-iately met with opposition by the business community, and implementation was delayed until sometime in 2016.  Few expect a delay beyond June 2016, which means that employers must get ready to assure compliance with new standards that will increase the minimum salary and compensation level needed for executive, administrative and professional employees (EAP) to be exempt from overtime payment.  This objective is to be accomplished through:

  1. An increase to the minimum salary level for full-time salaried employees to be exempt from overtime pay.
  2. An increase to the total compensation requirement needed for highly-compensated employees to be exempt from overtime pay.
  3. Implementation of an automatic mechanism for increases to the standard minimum salary levels required to qualify for overtime exemption going forward.

Minimum Salary Level

While the current regulation states that an EAP employee may qualify for overtime exemption if the employee is paid at least $455 per week ($23,660 a year), the amendments increase the minimum pay to $970 a week ($50,440 a year).

The potential impact on the current workforce in the U.S. is staggering.  An estimated 4.6 million workers exempt under the current regulations, who earn at least $455 per week but less than the proposed estimated weekly salary of $970, will become entitled to overtime payment if they work more than 40 hours per week.

Highly Compensated Employees

The proposed amendments seek to increase the current HCE threshold for EAPs from $100,000 to $122,148 annually.  The DOL states that the increase is necessary to ensure that the threshold remains a meaningful and appropriate standard when matched with the minimal duties test and provides exemption of only bona fide exempt employees.

Automated Increases to Exemption Salary Levels

Using Bureau of Labor Statistics data, the amendments include an automated increase for both the minimum salary level and HCE thresholds.  Accordingly, the minimum salary level exemption will be set to perpetually increase to remain at the 40th percentile of weekly earn-ings for full-time salaried workers and the 90th percentile of all full-time salaried employees for the HCE threshold.  Alternatively, the amendments seek to utilize the Consumer Price Index for Urban Consumers to provide the basis for annual increases.

Strategic Planning

With appropriate planning, the impact of these amendments can be minimized.

  1. Workforce Analysis.

Conduct a workforce analysis to identify employees who were previously exempt from over-time payment but who will now be nonexempt under the proposed salary level changes. Once identified, impacted employees should be required to clock their hours (if not already doing so) so that an appropriate analysis of compensation options can be performed.  The importance of record-keeping cannot be overstated, particularly as it relates to recording of time worked by salaried employees, including managers, who receive a base salary lower than the minimum salary level for overtime payment exemption.

  1. Minimize negative impact.

Using the workforce analysis data, determine an approach for managing the costs resulting from the regulation changes.  Consider whether to:

  • Increase salary to maintain the exemption.
  • Reduce salary to balance the overtime payments that will likely be incurred.
  • Maintain salary and delegate some responsibilities to an existing or new employee to ensure that the previously exempt employee does not work in excess of 40 hours.
  • Do nothing, and begin paying overtime when incurred by the newly nonexempt employees.

It will also be important to revise employee job descriptions to remove nonexempt duties from EAP employees and ensure that impacted EAP employees follow the revised job duties.

Finally, it’s wise to consider eliminating flexible work arrangements that permit exempt employees, previously in the exempt salary level range, to work from home or after normal business hours to complete projects or assignments.  Such hours worked are difficult to track and could result in unrecorded overtime hours and thus unpaid and wage-related claims under the FLSA.