HR Minute

Employers Beware: Overtime Rules are Set to Significantly Increase Number of Protected Employees

It may come as a surprise to many employers that a huge, federally mandated change to compensation requirements is just around the corner. Last year, the United States Department of Labor (DOL) issued a notice of proposed rulemaking, the intent of which is to expand the federally mandated overtime protections to millions of new employees. As a consequence, many employers who previously had no cause for concern with respect to overtime compliance, will now find themselves under the ambit of the rules.

With the 60-day notice and comment period well behind us, all that remains is for the DOL to issue the final rule and set a date for compliance (which will likely fall toward the end of 2016 or early 2017). Those who have reviewed the comments to the proposed rule are suggesting that, despite a fair amount of pushback by employers, the final version will be largely be consistent with what we have already seen. What does that mean for employers?

Primarily, the proposed rule is an effort to expand overtime protection under the Fair Labor Standards Act (FLSA). Prior to its issuance, the minimum salary amount required was $455/week, or $23,660 per year. Once the rule takes effect, however, this amount will likely more than double, and experts are estimating it will soon include employees making less than an $970/week, or $50,440 per year. Recall that overtime protection is characterized as “premium pay” in the amount of at least 1.5x the employee’s regular rate of pay for hours worked in excess of 40 in a week. For employers with even just a few employees below the threshold, this change could represent a substantial cost of labor increase.

Further, many employers operate under the erroneous assumption that, because they pay their employees a salary, the overtime regulations do not apply to them. Wrong.

The so-called “White Collar” exemptions, upon which most employers avail themselves to avoid paying overtime premiums to their salaried employees, actually contain three distinct elements. Each element must be satisfied in order for the employee to be properly “exempt” from the mandated FLSA overtime pay. The elements are as follows:

  1. The employee must, of course, be paid on salaried basis that cannot vary based on the quality or quantity of the employee’s work;
  2. The employee must be paid the salary minimum (soon to be an estimated $970/week); and
  3. The employee must primarily engage in work that is characterized as “executive, administrative or professional” in nature. Each of these categories have guiding criteria.

Failure to meet any one of these three elements results in an employee that is eligible for the mandated premium overtime pay. Employers should take this opportunity not only to ensure compliance with the salary level test, but also to confirm that their employees properly fall under the duties requirement (executive, administrative, or professional) delineated by the exemption.

The proposed rule also includes an indexing requirement that will likely lead to additional compliance efforts on the part of employers. Beyond the one-time raise in salary minimum contemplated by the rule, the DOL is also proposing to annually adjust the rate to be on par with the 40th percentile of all salaried employees. This marks a dramatic shift from previous salary level increases, each of which were aided by a notice and comment period from the public, and the lengthy period of time that typically accompanies substantive changes to DOL regulations. In other words, employers will now need to revisit the compensation structure of many of their employees on a yearly basis in order to ensure compliance with the new regulations.

Notwithstanding the pushback the DOL received from employers during the notice and comment period, the government appears poised to adopt the foregoing changes within the next 12 months. Employers should take action now to establish a plan of compliance both in anticipation of the initial application of the new rule, as well as to ensure continued compliance with each annual adjustment to the minimum salary level.

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