New DOL Overtime Rule Calls for a Fresh Look at Compensation Strategies

Rachelle-JonathanBy Rachelle Green & Jonathan Cardosi | More than two years after President Obama directed that changes be made, the U.S. Department of Labor recently issued a much-anticipated new rule revising the regulations that determine which white-collar, salaried employees are entitled to overtime pay protections under the Fair Labor Standards Act (“FLSA”), among other things.

The rule, which takes effect December 1, 2016, increases the salary threshold – from $23,500 to $47,476 per year – under which most white-collar, salaried employees are guaranteed overtime.  Predictions are that the new rule will impact roughly 4.2 million employees, so employers should act now to review their classifications and make thoughtful decisions as to how best to deal with the change.

Generally, in addition to all hourly employees, who are guaranteed overtime for hours worked over 40 per week, salaried employees who both 1) make more than the salary threshold set by the DOL and 2) pass the “duties test,” demonstrating that they primarily perform executive, administrative, or professional duties (with some occupations exempted, including teachers, doctors, and lawyers) are presumed to have the same guaranty.

Although the new rule doubles the salary threshold, increasing the overtime protections to millions of employees, it also allows employers to count bonuses and commissions for up to 10% of the minimum salary threshold as long as they are nondiscretionary and paid at least quarterly.  The rule also increases the annual salary threshold for highly compensated employees from the current $100,000 to $134,004, at which point only a minimal showing is needed to demonstrate that these employees are not eligible for overtime.

Given the significant consequences resulting from FLSA violations, which can include awards of up to triple the amount that should have been paid to an employee for overtime work and payment of the employee’s attorneys’ fees, employers are well advised to use this rule change as an opportunity to review their compensation strategies for affected workers. Simply put, there are three basic options for dealing with white-collar, salaried employees who meet the duties test and make less than $47,476:

  1. Raise employees’ salaries above the new threshold and keep them exempt from overtime. For example, if an employee who meets the “duties test” – meaning his or her duties are truly those of an executive, administrative, or professional (as those terms are defined by the FLSA, which are different than the way they are used in common parlance) – and has a salary that is close to the new salary threshold, it may be more economical to increase his or her salary rather than pay overtime.
  2. Pay time-and-a-half for overtime work. Employers can also keep salaries the same and pay for overtime work. This may be more economical when dealing with employees who are paid much less than the new threshold and/or those who only occasionally work over 40 hours per week.
  3. Limit employees’ hours to 40 per week. Employers can also evaluate and realign hours and staff workload to ensure that they do not see an increase in salary expense if their affected workers are not managed properly.

One of the goals driving the updates was to maintain the salary threshold at the 40th percentile of full-time salaried workers in the lowest-income region of the country (which is why it was increased to the current amount), and to require a reassessment every three years to ensure the threshold follows inflation. The first such revision will take effect January 1, 2020 and is projected to raise the threshold to more than $51,000.

Finally, as a reminder, the FLSA still requires employers to keep certain records to track non-exempt employees’ hours – including those of its non-exempt white-collar workers, and compensatory time is not permitted as a substitute to payment of premium overtime pay (except for public agencies).

All told, on December 1, 2016 many employers’ exposure to wage and hour claims will increase dramatically. With the rise in these types of claims by employees, which can include expensive class action lawsuits, employers are well advised to make sure they are in compliance by the effective date.

Contact Rachelle Green or Jonathan Cardosi to learn more.