Overtime Rule Change Could Become Effective in 2016

In late June, the Obama administration released a proposed overtime rule that adds some 5 million people nationally to those eligible for time-and-a-half pay for working more than 40 hours a week. The estimate of the number of workers affected is 2.2 million in the retail and restaurant industries alone. In Alabama, the proposed rule could bring 48.6 percent of full-time salaried workers under overtime rules (See report for state-by-state numbers.) The secretary of labor at the president’s request began the process to expand overtime eligibility for American workers in March 2014.

Proposed rule as published July 6 in the Federal Register

 The 60-day comment period on the proposed rule ended Friday, Sept. 4.

The president has indicated he wants this change made before he leaves office. The U.S. Department of Labor had indicated the final rule would be issued in July of 2016, but in mid-March of 2016, the department sent final changes to the White House Office of Management and Budget for review. On May 18, 2016, the Obama administration released its final rule. Employers are to implement the new rule by Dec. 1, 2016. Learn more.

Under the Fair Labor Standards Act, overtime (1.5 times the regular rate of pay) is required for each hour worked over 40 in a week, unless an employee is classified as exempt. Overtime violation claims are the No. 1 complaint filed with the U.S. Department of Labor.

For most employees, employers must apply the following three tests to determine if they can be classified as exempt. The employee must be:

  • paid more than a specified salary ($455 weekly now; to increase to about $970 weekly in 2016 under proposed rule)
  • paid a fixed salary that is not subject to reduction based on quality or quantity of work performed, AND
  • their duties must be primarily executive, administrative or professional.

The salary level test does not apply to outside sales employees, licensed or certified doctors, lawyers, teachers and employees in certain computer-related occupations, primarily programmers, who are paid at least $27.63 per hour.

The burden is on an employer to prove that an employee has been properly classified as exempt.

The last time the U.S. Department of Labor updated its white-collar overtime regulations was in 2004.

At this time, the only one of the three “white-collar” tests involved in the proposed rule change deals with the salary level.

The rule change would more than double the minimum salary necessary to qualify for an executive, administrative, professional or computer programmer exemption from the current $455 per week, or $23,660 annually, to approximately $970 per week , or $50,440 per year in 2016. The rule automatically sets the minimum salary at the 40th percentile of weekly earnings for full-time salaried workers.

Few businesses have managers who earn only $455 a week, but the rule change will affect more employers if, as proposed, the minimum salary more than doubles. The only employees affected by the change are those (1) currently classified as exempt, (2) paid an annual salary of between $23,660 and $50,440, AND (3) who work overtime. These employees will no longer be exempt regardless of their duties.

The proposed rule also raises the salary level for the highly compensated employee exemption from $100,000 to an estimated $122,148 annually (the 90th percentile of weekly earnings for full-time salaried workers). DOL wants this exemption to be for salary only and not to include nondiscretionary bonuses or commissions.

Department of Labor Fact Sheet on Proposed Rule

In its fall 2015 regulatory agenda, the DOL wrote that it was targeting a July 2016 release date. The final rule was issued May 18, 2016, employers have until Dec. 1, 2016, to comply.

There are steps employers can take now to prepare for the change. Employers should not wait until the final rule goes into effect to determine potential impacts.

First, consider what you don’t have to do:

  • Employers don’t have to change employee job titles if they move a position from exempt to non-exempt.
  • You do not have to change job duties.
  • Adjustments do not have to include pay raises. You don’t have to convert to a system that pays more.

Proactive steps to consider:

  • Identify employees currently classified as exempt but making less than or near the anticipated $50,440 salary requirement. You might consider identifying all exempt employees earning less than $60,000 per year. Track these employees on a spreadsheet.
  • Determine the hours worked for those employees close to or under the salary threshold and estimate your exposure to overtime.
    • Meet with these employees and roll out a time-keeping procedure.
    • Have them turn in hours spent working (you may need to define what they should record) in a manner that those hours can be tracked on a weekly basis.
    • Do not use the data to pay anyone differently yet.
    • Evaluate the data to determine what an effective hourly rate might need to be in order to account for the employee’s probability of working overtime.
  • Begin a cost-benefit analysis of adjusting the salaries of employees who fall below the proposed salary threshold compared to reclassifying them as non-exempt. Factor in the potential for an annual salary level increase.
  • Prepare a communication plan for employees who may be affected by the changes. Tell them the law is changing and why. Make whatever changes need to be made effective on the same date the final rule becomes effective. This date is to be determined. Be prepared to handle the backlash of lost flexibility and prestige. Have employees direct question internally and designate to whom those questions should be referred. Follow up after changes.

The three basic choices are to:

  • Reclassify salaried exempt employee as hourly and pay overtime worked. When making this change, policies need to be set for accounting for time that previously wasn’t tracked, such as:
    • Responding to after-hours demands, calls, e-mails.
    • Other off-the-clock work, such as rest and meal periods.
    • Restrictions on work away from work. Generally not compensable.
    • Creating time cards and having them approved.
    • Discipline for working unauthorized overtime.
  • Split the job into two part-time positions.
  • Give salaried employee a raise to the anticipated threshold and confirm employee satisfies applicable duties test.

SOURCES: National Retail Federation; Wage and Hour Changes, Confusion and Compliance Webinar conducted by Lehr, Middlebrooks, Vreeland and Thompson (Alabama Retail members can register to listen to the recorded webinar for free); and presentation by John B. Holmes III, Maynard, Cooper Gale, to the Alabama Council of Association Executives.

Lehr, Middlebrooks, Vreeland and Thompson and the Alabama Retail Association have made an Aug. 5, 2015, webinar concerning the proposed overtime rule change available to Alabama Retail members at no cost. Contact Nancy Dennis for the promo code needed to view and hear the $95 webinar for FREE. Once you’ve registered for the webinar using the promo code, a Lehr, Middlebrooks representative will send you a link to view the webinar.

>> Register for the recorded webinar