UPDATE: On November 22, the U.S. District Court for the Eastern District of Texas granted a preliminary injunction on the implementation of the new Department of Labor (“DOL”) overtime regulations. For now, businesses and employees are in a holding pattern, and businesses can continue to follow the existing rule. The preliminary injunction is not a permanent decision. The DOL can challenge the injunction, and the court still has an opportunity to review the merits of the lawsuit. If in doubt, contact your labor attorney to discuss your specific situation.
November 2, 2016 – Department of Labor Announces Changes to Overtime Wage Rules
The Department of Labor (“DOL”) announced it would update the overtime regulations in a manner that will affect an estimated 4.2 million American workers. While this update is welcomed by employees, many businesses and business owners argue that the new rules will cause economic harm; and, they are not alone. The state of Texas partnered with Nevada to lead twenty-one states in a lawsuit against the Labor Secretary and the DOL seeking to stop the implementation of the new regulations. It is unlikely that the courts will issue a decision prior to December 1st, and as such, businesses are advised to continue preparing for the impending change.
What changes are set to take effect and how should employers respond?
Labor attorney Tom L. Case with Bell Nunnally Martin LLP weighs-in below.
In a long-awaited move to extend eligibility for overtime pay, the Department of Labor announced it would update the overtime regulations in a manner that will affect millions of American workers. Beginning on December 1, 2016, three key changes will take effect:
- The minimum salary requirement for exempt employees will increase from $455 per week ($23,660 per year) to $913 per week ($47,476 per year), which represents the 40th percentile of earnings of full-time salaried workers in the census region with workers earning the lowest wages (currently the southern region of the United States);
- The total compensation requirement for highly compensated employees subject to a minimal duties test will increase from $100,000 per year (including $455 per week) to $134,004 per year (including $913 per week), which represents the 90th percentile of full-time salaried workers nationally; and
- There will be a mechanism to update these salary and compensation levels automatically every three years to sustain the percentiles referenced in paragraphs 1 and 2 above.
As most employers know, the Fair Labor Standards Act requires employers to pay their employees one and one-half times those employees’ hourly wage rate for every hour those employees work in excess of 40 during a given workweek, unless those employees qualify for an exemption. The most common overtime exemptions apply to employees who occupy certain white collar professional and management level positions and earn at least $455 per week ($23,660 per year). These management positions typically fall under the executive, administrative, and professional exemptions.
The new minimum salary requirement for these exemptions will double by the end of this year to $913 per week ($47,476 per year). This dramatic increase will effectively require employers to reclassify — as no longer exempt from overtime — millions of employees currently occupying management level positions. The Department of Labor estimates 35% of full-time salaried workers will be entitled to overtime based upon their current salaries when these regulations take effect. This new salary threshold will likely hit the retail, hospitality, and restaurant industries the hardest.
Obama administration officials have said this sizable jump is needed because inflation has eroded the value of the existing salary threshold, leaving too few workers eligible for adequate pay in an economy where wages have been stagnant since the turn of the century. Reaction from employer advocacy groups was uniformly against this sharp increase. “Just because there is an overtime rule change does not mean there’s going to be overtime pay,” said David French, Senior Vice President of Government Relations for the National Retail Federation. The National Retail Federation estimates the new threshold will affect around 2.2 million retail and restaurant workers, which consists of 65% of the salaried employees in the industry. Of the 2.2 million retail and restaurant workers the Retail Federation expects to be affected, it estimates about 104,000 whose pay is close to the new threshold would see an increase in their base salaries of nearly $1,500 per worker. The Federation, however, expects those workers could also see an equivalent decrease in their benefits and bonuses.
How Do Employers Respond to This?
- Increase the Salary for Certain Managers. For current exempt employees who earn less than $913 per week, it may make sense for their employers to increase such employees’ pay to maintain their eligibility for an exemption. For example, a business owner could raise the salary of an assistant manager earning $807.69 per week ($42,000 annually) to the new minimum of $913 per week ($47,476 annually), assuming the economics of the position justify the increase. Whether such an increase is profitable will depend on a host of factors, including:
- The amount of overtime that position requires (the more overtime, the more the increase financially makes sense),
- Whether the employer can absorb the increase in pay (study the position’s profitability and return on investment on a weekly and monthly basis), and
- Whether limiting other co-workers’ hours or decreasing management level benefits could offset such an increase.
- Convert the Managers to Hourly and Restrict Overtime Use. For situations where a salary increase is not financially viable, business owners and managers should convert affected employees’ pay to an hourly wage rate. Like other hourly workers, businesses should then begin tracking these employees’ hours worked as they will be eligible for overtime. Employers also will need to comply with the record-keeping requirements applicable to their other hourly employees.
Many workers — especially managers — will likely view this as a demotion despite their job responsibilities remaining the same. Employers with managers who typically work 10-20 hours a week of overtime, however, risk runaway payrolls unless they make this conversion and minimize the amount of overtime worked by these newly minted “hourly managers.” Employers should implement strict rules that require these “hourly managers” to receive approval prior to working overtime. Written approval is preferable. Some employers have suggested cutting the number of hours these employees work to a straight 38 hours per week schedule without eligibility for overtime. Again, the specifics of each workplace will dictate the options that make sense for these soon-to-be “hourly managers.”
- Evaluate Current “Exempt” Employees’ Job Duties. During the past eight years, the Department of Labor increased the degree of scrutiny it placed on employers and how they classified workers. Employers should be cognizant of the duties their exempt employees actually perform to ensure they meet the duties component under the applicable exemptions (e.g. executive, administrative, or professional).
– By Tom L. Case with Bell Nunnally Martin LLP, Guest Contributor
For more information and assistance with navigating through the changes coming to the Fair Labor Standards Act, please feel free to contact Beaird Harris at 972-503-1040.