I was all set to write about a completely different, but thought-provoking topic this week. It will have to wait until next week though, because, well, how can I ignore this breaking news? What, you ask, is the breaking news that merits this change of plans? The Department of Labor published the new overtime rules yesterday, which I last wrote about here. Now the clock starts running–for Congress and for employers. So, when does the clock stop and what do all you employers out there have to do before that magic date? We’ll have that information for you–after the jump, of course!
(image from pointofsuccess.com)
Since there is a slight change in the rules since the last time we looked at them, let’s first recap the key provisions. The final rule as published:
- sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South: $913 per week, $47,476 annually for a full-year worker). (While this doubles the current threshold of $455 a week or $23,660 annually, this is a slight change from a few months ago, where the salary level would have been $970 a week or $50,440 annually for a full-year worker);
- sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, at $134,004. (This is a change from the initial rules that would have set the threshold for this exemption at $122,148. Either way, the increase is significant, as the current threshold is $100,000);
- establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption (In other words, whatever the thresholds are now,
- amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
With the exception of the automatic increases, the new rules take effect December 1, 2016. The automatic triennial increases will begin on January 1, 2020.
Now, in my previous post on this topic, I did mention that it is at least theoretically possible for Congress to pass legislation in roughly the next 60 days that would overrule these new rules. I also mentioned that even if both Houses manage to pass such legislation, the President would veto it. Congress would then need to get enough votes — a two-thirds majority to be exact–to be able to override a presidential veto, a very unlikely scenario. We should therefore assume that the new rules are here to stay until further notice. The result: the DOL estimates that another 4.2 million workers will be eligible for overtime pay.
Please note, however, that these new rules do not change the salary threshold for all otherwise exempt employees. Rather they only apply to those employees who otherwise fit within the , Executive, Administrative, Professional and Highly Compensated Employee exemptions. Ergo, many employees who currently meet the criteria for creative professional, computer employee, outside sales representative, and inside (or “commissioned”) sales employees will continue to be exempt from overtime even after the new rules take effect. Also, for now, the duties tests for all exemptions remain unchanged. (The DOL has made some noises about re-visiting those tests at some future time, however.)
While these new rules may have significant impact on your current compensation practices, you are not powerless. While I did discuss your options, and some best practices, in my last post on this topic, it’s worth exploring them again. Here are some:
- Re-evaluate any positions currently classified as exempt. Make sure they are exempt under current regulations, and then determine if they will meet the new salary test. If any of your employees are not truly exempt now, they certainly will not be under the new salary test. Consider engaging competent outside employment counsel or another FLSA expert. Even the most well-intentioned employers often make mistakes in this area.
- Consider giving raises to those employees currently classified as exempt, whose salaries are close to the minimum threshold, in order to safeguard the exemption. The amount of the salary increase may be more than offset by the amount of overtime you could otherwise owe.
- Tighten up your overtime policies and limit permissible overtime work. (The reasons for this option seem pretty self-explanatory).
- Consider whether the costs associated with hiring additional or part-time workers to handle any overflow in the workload might be less than paying overtime to and placing more demand on your existing non-exempt or soon-to-be non-exempt workers.
- Consider re-structuring positions currently classified as exempt that currently require more than 40 working hours each week, that not meet the new salary test, so those employees work no more than 40 hours a week.
Now, I have heard that some employers are considering cutting base salaries to offset additional overtime. Frankly, I am not convinced that this is a good idea. In many cases it may be penny-wise and pound foolish. If you have employees with whom you are otherwise satisfied you risk losing them. Whatever might save in overtime is at least partially offset by turnover costs. In addition, if you lower salaries you may have trouble attracting and retaining good talent. If that’s not enough, employees who feel they are not being treated fairly are more likely to find reason to sue or file administrative charges. Even if the charges have no merit, the costs you incur defending them also eat into any savings you thought you would realize. In other words, don’t get cute! (I’ve rarely if ever seen that end well.)
OK, well hopefully I’ve given you some food for thought–at least until next week where, barring new laws, or US Supreme Court decisions, I will be back with the topic I planned on writing about this week–which is still a surprise for now. Toodaloo!
Disclaimer: Contents of this post are for educational/informational purposes only, are not legal advice, and do not create an attorney-client relationship. Consult with competent employment counsel in the state(s) in which you employ people with your specific questions.
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