The United States Department of Labor (DOL) has published a final rule in the Federal Register updating overtime regulations that will automatically extend overtime pay protections to over four million workers within the first year of implementation.
The final rule, effective December 1, 2016, includes an exempt employee threshold of $47,476 ($913 per week) – less than the July 2015 proposed rule’s $50,440 but slightly more than double the old threshold of $23,660. The new regulation also provides for automatic updates every three years and allows up to 10 percent of the minimum salary level to be paid through nondiscretionary bonuses, incentive pay, or commissions.
In 2014, President Barack Obama signed a Presidential Memorandum directing the department to update the regulations defining which white collar workers are protected by the Fair Labor Standards Act’s (FLSA’s) minimum wage and overtime standards. Consistent with the president’s goal of ensuring workers are paid a fair day’s pay for a hard day’s work, the memorandum instructed the department to look for ways to modernize and simplify the regulations while ensuring that the FLSA’s intended overtime protections are fully implemented.
Key Provisions of the Final Rule
The final rule focuses primarily on updating the salary and compensation levels needed for executive, administrative, and professional workers to be exempt. Specifically, the rule:
1. 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);
2. 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 ($134,004); and
3. 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.
Additionally, the final rule 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.
The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) become effective on December 1, 2016. Future automatic updates to those thresholds will occur every three years, beginning January 1, 2020.
In an article written by Allen Smith of the Society for Human Resource Management (SHRM), Lee Schreter, an attorney with Littler in Atlanta, Georgia, and chairperson of the firm’s board, said an increase in the minimum salary could lead to a “death spiral” for the white-collar exemptions. The exempt salary threshold suddenly could be north of $75,000 in several years, she said.
With the increase, employers will have to every three years monitor the minimum acceptable salary level for exempt classification, identify employees impacted by a new minimum salary requirement, and assess whether to reclassify the affected employees or restructure jobs, noted Alfred Robinson, an attorney with Ogletree Deakins in Washington, DC, and former administrator of DOL’s Wage and Hour Division.
Depending on the timing of the increases, employers may need to restructure their review/compensation cycle to more fully align with the regulatory scheme and allow them to understand the required salary amounts at the same time they are determining merit raises and bonuses, said Alexander Passantino, an attorney with Seyfarth Shaw in Washington, DC, and former acting administrator of the Wage and Hour Division. In addition, employers may look three years out to determine whether the continued salary increases are sustainable or whether the position should just be reclassified at that time.
Raising the salary level to $47,476 results in an increase of more than 100 percent and exceeds New York’s exempt threshold of $35,100 and California’s exempt threshold of $41,600. “It will still impact millions of employees and be a huge burden for some industries, small businesses, nonprofits, and some regions,” the SHRM article quoted Robert Boonin, an attorney with Dykema in Detroit and Ann Arbor, Michigan, and an immediate past chair of the Wage and Hour Defense Institute, a network of wage and hour lawyers.
The final rule “is perhaps the most significant workplace development we’ve seen in our professional lifetimes,” he said. “It’s a game changer, and not necessarily a good one.”
The new salary threshold “will definitely have an impact on small businesses, especially in areas of the country that have a lower cost of living,” said Lisa Chui, vice president of finance and human resources at Ubiquity Retirement + Savings in San Francisco, California, a provider of retirement and savings plans for small businesses. “However, it’s a good catalyst to ask the question ‘How can we work smarter?’ vs. ‘How can we work longer?’ “
Yet a $47,476 threshold “does not eliminate the difficult decisions that employers will face when two employees in the same position earn different salary levels – one above and one below the new mark” when the position’s salary accounts for cost-of-living variances by geography, Passantino observed.
The whole point of overtime is not for employees to earn more money, but “rather to make it so expensive for employers to have people work long hours that employers will instead elect to spread the work around to more employees,” said Paul DeCamp, an attorney with Jackson Lewis in Reston, Virginia, and former administrator of DOL’s Wage and Hour Division. “It is no coincidence that many, if not most, companies have long had a rule that nonexempt employees are not to work overtime without permission from their supervisor or manager, and supervisors and managers are usually under pressure not to have the employees they oversee working overtime unless there is a real emergency or an unavoidable spike in the workload.”
In the SHRM article, DeCamp said employees reclassified as nonexempt will, in most instances, see their hours and pay drop. “This result will make a lot of employees very unhappy,” he said. “The administration’s hope that employers will simply eat the cost of the additional overtime expense and in effect give all of these millions of workers a big raise is unrealistic in the extreme.”
However, Allan Bloom, an attorney with Proskauer in New York City, New York, said the rationale for increasing the salary threshold was “simple.” The old minimum salary for exempt workers “was found to be at or near the poverty line for a family of four,” he noted.
In a May 2nd letter to Shaun Donovan, director of the Office of Management and Budget, Senator Elizabeth Warren (D-MA) said, “Too often, the voices of workers are buried beneath a flood of comments from lobbyists and lawyers. But the record before your agency demonstrates that American workers are demanding updated overtime rules. Updated overtime rules will give millions of working families a fighting chance to build more financial security for themselves. It’s time for us all to listen to those voices.” Her office also released a report highlighting the benefits of the new overtime rule for workers and their families.
Following are some steps SHRM listed for human resources to take to comply with the new rule.
• Quickly assess the costs of reclassification versus salary increases. “Determine if it’s feasible to raise salaries to retain the exempt statuses of those on the cusp of the new salary level,” Boonin said. “Reclassify those who fall under the new threshold and determine their pay structure – salaried plus half-time, hourly plus time and one-half, bonus and commission changes.” Nondiscretionary bonuses and commissions are included in the calculation of the exempt salary threshold up to 10 percent of the required salary level, as long as employers pay those amounts on a quarterly or more frequent basis.
• Implement and communicate the compliant approach to affected employees and managers. Determine whether communications about the rule will be in one-on-one meetings, small group meetings, large group meetings, memos, or a combination of these approaches, Boonin recommended.
• Train supervisors on managing nonexempt employees, advised James Swartz, an attorney with Polsinelli in Atlanta, Georgia.
• Check whether state wage notification laws require a pay period or 30 days’ notice of any change in pay and send out notices about the changes, if required.
Swartz said managers must understand how to train nonexempt employees to track and report time, avoid encouraging work after hours, and manage overtime. Employee morale should be managed in the event of reclassification or salary compression, he added.
Reclassified employees may view the change as a demotion, the SHRM article stated. In addition, if employers decide to raise the pay of employees in the same position above the new exempt salary threshold, the difference between the pay of top and low performers may be compressed, Schreter explained. Plus, the difference between the pay of those with raised salaries and their bosses may shrink as well, adding more morale problems.
Communications with employees should emphasize that reclassification was a result of changes in the regulations. Employers should note that “any reclassification is not a reflection of the value of an employee’s contributions to the success of the organization and [that] the company will work with employees impacted by reclassification to make a successful and positive transition,” Robinson remarked.
August 2016 RENDER | back