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New DOL Overtime Rules May Spell Trouble for Employers

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Update (11/12/2015): Due to an overwhelming number of responses to the proposed DOL overtime regulations, the DOL indicated that any final regulations on the new overtime rule likely will not be published before late 2016.   Over 250,000 public comments were received on the proposed rule changes. We will provide further updates as we receive them. 

  

The U.S. Department of Labor (DOL) has issued proposed changes to the overtime eligibility rules with respect to the executive, administrative and professional employee classifications otherwise known as “salaried” or “exempt” employees.

These proposed changes will impact many employers if the final rules become effective next year without further modifications.  The proposed rules raise the income level at which workers can automatically qualify for overtime eligibility without regard to job classifications or duties. 

The Impact of the Proposed DOL Overtime Rules

Approximately 5 million workers are in line for pay raises as a result of the application of these new rules.  The objective behind these proposed rule changes was to minimize the risk that employees legally entitled to overtime will be subject to misclassification simply because they are currently classified as salaried employees who otherwise have satisfied the job duties tests as exempt employees. 

In other words, employers can no longer avoid the overtime laws just by giving an employee a title and putting that employee on salary.  

Under these proposed regulations, any currently salaried "exempt" employee making less than $24.25 per hour, $970 per week, or $50,440 annually will be eligible for overtime pay beginning in 2016. 

“Exempt” employees are currently ineligible for overtime pay because of their designation as “exempt” as long as they receive a salary at or above a minimum level, whereas a “non-exempt” employee is currently eligible for overtime pay.  

Presently, an exempt employee must now earn a minimum of $455 per week for an annual salary of $23,600.  This minimum level has not been raised in decades.  In fact, a salary of $23,400 is actually below the federal poverty level for a family of four.  Thus, all employees, regardless of job title or job duties, who are earning a salary between $23,600 ($455/week) and $50,440 ($970/week) would now be eligible for overtime pay if or when the proposed rules become final.

FLSA Basics: The Rules Today  

Under the Fair Labor Standards Act, an “exempt” employee is defined as someone who is paid on a salary basis, paid a certain salary level (the current minimum salary level is $455/week) and must perform certain duties which are either Administrative, Professional or Executive. 

The FLSA applies to employers in the private sector and in federal, state and local governments.  Employers must have two or more employees, be engaged in interstate commerce and have annual gross income of $500,000. 

These proposed regulations have no effect on the job duties or the classification of an employee as exempt or non-exempt making any reclassification unnecessary; rather they only establish the salary threshold for overtime eligibility purposes. 

The DOL has suggested that these salary thresholds will include incentive payments and nondiscretionary bonuses that are tied to productivity, profitability and/or specified performance metrics, but the current DOL position on commissions is that they will not be figured into this computation.  It should be noted that there are additional recordkeeping requirements under the FLSA (hours worked each day and total hours worked each week) depending on whether you have exempt or non-exempt employees. 

However, if you are a Wisconsin employer, this distinction does not matter since Wisconsin employers have recordkeeping requirements for all exempt and non-exempt employees.

6 Ways These Proposed Changes Will Impact Employers

There are a few important things to note about the proposed changes to the overtime eligibility rules:

  • You do not have to change job titles or job duties for employees (the determining factor is salary level).
  • Many employers will now have more employees eligible for overtime pay without better planning and monitoring of employee hours worked.
  • Employers must examine their current policies and practices, especially time keeping policies, as it relates to these employees in the $23,600-$50,440 pay range in order to ascertain any hidden overtime.   It may come as a huge (financial) surprise that there are exempt employees in this pay range who are now working overtime on a weekly basis. 
  • Employers need to be aware of, and include time spent by exempt employees in this pay range who are performing work activities while working through lunch or outside of their normal work hours.  This may include making phone calls from home or in the car, sending emails from home or working from home since these type of  common “exempt” activities may now be considered for overtime purposes.  
  • Determine how these new overtime rules, timekeeping and payroll practices are going to be communicated to employees and how will this impact morale and work performance.
  • Consider an outside third party to perform an audit of your systems and recordkeeping.

The comment period to the DOL for these proposed regulations has already passed.  What remains to be seen is what proposed rules, if any, the DOL will change due to the wide array of comments it has received. 

A final decision is expected in early 2016 to be effective shortly thereafter.  Employers should brace for the fact that there will be some new regulations on overtime pay, and they will not be favorable for the employer.