The New Overtime Regulations: How Will They Affect Your Workplace? (Part 2)
New overtime regulations unveiled by the U.S. Department of Labor (DOL) on May 18, 2016 will affect approximately 4.2 million currently “exempt” workers. Unless their salaries are increased to at least $913/week, these employees will become entitled to receive overtime pay. In its first increase since 2004, the minimum salary level for exemption from overtime pay under the Fair Labor Standards Act (FLSA) has doubled, from $455 per week ($23,660 annually) to $913 per week ($47,436 annually). The salary level for highly compensated employees (HCEs) also has been increased, from $100,000 to $134,004 annually. These changes, which are anticipated to impact employers in all industries, become effective on December 1, 2016.
To help you navigate the waters, we have prepared a multi-part series discussing these regulatory changes and how they will affect employers and workers. In this second segment, we provide suggestions on a number of actions employers should take NOW in preparation for the fast-approaching December 1 compliance date.
Audit current job descriptions, pay and recordkeeping practices to identify and resolve compliance issues
Employers should review job descriptions and requirements for all positions currently identified as exempt to ensure that they are accurate, up-to-date, and meet the requisite FLSA duties tests. Be sure to follow up on potential issues, such as whether a position or an employee has been incorrectly classified as exempt and what remedial steps (if any) may be required. Since employers are being thrust into the position of having to review and overhaul their current pay practices, a comprehensive Best Practices Audit is recommended. This audit would entail, among other things, a review of: worker classifications, including exempt/non-exempt and employee/independent contractor status; timekeeping, payroll, and recordkeeping practices; compensation components, plans, policies and practices; employee benefits and leave; and the wide array of employment policies and practices.
Assess whether to maintain exempt status or reclassify positions as non-exempt
You will first need to identify all exempt executive, administrative and professional employees who currently earn less than $913/week and determine whether to maintain their exempt status or reclassify some or all of them as non-exempt. This will entail an analysis of each employee’s current pay rate and the hours that he regularly works to determine whether it is more cost-effective to increase the employee’s weekly salary to $913 or to reclassify the employee as non-exempt and pay him overtime at the rate of one and one-half times his effective hourly rate for all overtime hours worked in any given workweek. The answer may very well differ with each employee. Understanding that you may have to revisit the issue every three years because of anticipated adjustments to the minimum salary level, the basic question to analyze is whether it is more cost-effective for an employer to maintain exemptions or to reclassify employees to make them eligible for overtime. Further, although the bulk of the inquiry relates to wage and benefits costs, employers must also consider the impact of changes on how their business operates and whether reclassifying employees as non-exempt will result in other costs, such as whether more workers will be needed to perform the same amount of work, whether exempt employees will be required to perform additional duties at increased pay, whether additional supervision will be required, and other costs of operating the business. Reclassification of employees as non-exempt may also result in “morale costs” that will be difficult to quantify.
Employers should keep in mind that even though the DOL did not modify the standard duties tests, it has signaled that it may review and revise those tests in the future. Changes to the duties tests to limit the scope of the exemptions may require reclassification to non-exempt status of employees who are paid at least the minimum salary level but who do not meet any revised standard duties tests, making them eligible for overtime compensation. The impact of bifurcating changes in the salary level from changes in the standard duties tests suggests that even after an employer increases employee salary levels to preserve the overtime exemption, many of them could ultimately lose the exemption and become entitled to overtime pay.
Revise job descriptions and job titles in accordance with decisions to maintain exemptions or reclassify as non-exempt
Once decisions are made to either maintain exempt status or reclassify positions as exempt, you should review and revise job titles and job descriptions in accordance with the decisions. This is an excellent opportunity to restructure jobs and overhaul current position descriptions to conform with the actual job duties and an evolving workplace. Follow good job description practices, including accurate descriptions of duties, and include qualifications, physical requirements, classification, disclaimers and other useful elements to ensure that job descriptions serve as useful tools for both employers and employees.
Implement timekeeping procedures for all employees, including exempt employees
As discussed in Part 1 of this Series, the regulations amend the salary basis test to permit employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the new standard salary level ($913/week) for employees who may qualify as exempt, but who do not meet the HCE requirements. Thus, nondiscretionary incentive bonuses tied to productivity and profitability may be counted; however, the amount attributable to the standard salary level is capped at 10 percent of the required salary amount ($91.30/week and $1,186.90/quarter). The 10% amendment does not apply to HCEs because employers are already permitted to fulfill almost two-thirds of the HCE total annual compensation requirement with commissions, nondiscretionary bonuses and other forms of nondiscretionary deferred compensation earned during a 52-week period.
The new regulations permit employers to make catch-up payments for non-HCEs who do not earn enough in nondiscretionary bonuses and incentive payments (including commissions) to retain exempt status. Such catch-up payments must be made at least quarterly. If the employer does not make the catch-up payment, the employee will be entitled to overtime pay for any overtime hours worked during the quarter in which the employee is not paid at the minimum salary level. Likewise, an HCE who does not receive the requisite catch-up payment will not qualify as an HCE (even though s/he may still qualify under another white collar exemption) and may become entitled to overtime pay for the preceding year. As a result, employers should consider implementing timekeeping procedures for all employees, including employees who are currently exempt. While this may be difficult at first, timekeeping provides employers with the requisite records to defend overtime claims and avoid recordkeeping violations in the event a DOL audit results in findings of misclassification.
Implement electronic device use and other policies to avoid and control compensable time
Exempt employees are often expected to monitor and respond to email 24 hours a day, 7 days a week, and to be available for calls as needed. They may be accustomed to bringing their work home and working at times that best fit their lifestyle and preferences. Many employers do not monitor such work time because it is non-compensable; however, once converted to non-exempt status, time spent on virtually all work-related matters must be compensated at the employee’s hourly rate and count towards overtime. Left unregulated, such additional “work time” can create additional expense and may result in FLSA violations.
Employers should thoroughly review their policies and practices to determine whether revisions, training and/or stricter enforcement are needed in light of reclassification of formerly exempt employees to non-exempt status. For example, meal and rest breaks should be implemented and enforced; electronic device use, remote work, and travel time policies and practices may need to be adopted and/or revised, and compliance carefully monitored. Employees who are reclassified to non-exempt status may have difficulty breaking old habits and may simply choose to work “off-the-clock” and not record their hours. Although “voluntary,” such behavior can create serious FLSA liability. Requiring documentation for all time worked is the most efficient approach to determining whether compensation must be paid; it is also the best defense to allegations of compensable time violations.
With so many changes impacting the workplace, employers should train supervisors about the various decisions made and anticipated changes in the workplace, with a focus on emphasizing employer policies and practices, compensable time issues and recordkeeping. The employees reclassified to non-exempt status will also need to be trained about timekeeping and compensation rules that have become applicable to them. Repeated monitoring and support of these employees to ensure compliance will be critical.
What Happens Next?
Despite the DOL’s optimism at increasing wages and the number of workers eligible for overtime, workers will also suffer various adverse consequences. Continue to follow us for the next several weeks as we delve into the revised regulations and a multitude of potential issues and outcomes. Our future Alerts will discuss anticipated impacts of the new rules on both employers and workers and how to handle them, as well as focus on issues for specific industries, including educational institutions, restaurants, non-profits, retail, service and production industries.
Also watch for our Roundtable Series coming to a location near you – we will sit down with clients and friends to discuss how the new overtime regulations will affect your industry and workplace and provide you with practical solutions.