"Millions to Earn More in Overtime!": Facts and Fiction of the New FLSA Final Rule
By Mike Haberman
That is what the newspaper headline read on the front page of the morning paper. Yes, as many of you are aware, the Department of Labor has finally released the final regulations regarding the new wage standard for exempt level employees. There was both good news and bad news in the notice published by the Department of Labor.
In July of 2015, the Wage and Hour division of the USDOL published proposed regulatory changes over the definition of who could or could not be an exempt employee. An exempt employee is, by definition, an employee who is exempt from being paid overtime. That means that an exempt employee can work as many hours as necessary without earning any more money other than their stated salary. In the proposed regulation, the figure stated was to be $970 per week, or $50,440 since it was to be indexed at 40% of the weekly earnings of all salaried employees in the United States. That level shook a great deal of people up since the current level is $455 per week or $23,660. There were also rumors that the duties test was going to be changed and made more stringent. The duties test is what you look at to determine if someone is meeting the work standards it takes to be an exempt employee.
What Actually Occurred?
Here’s the good news: This new regulation only affects the executive, administrative, and professional exemptions. The new level to qualify to be an exempt employee is $913 per week or $47,476 per year, which is better than $50,440. They ended up basing this on wages in the Southern states.
Unexpectedly, they announced it will not be adjusted annually as originally anticipated, but every three years instead. Though this could be problematic, as I will discuss later. The new regulation does allow you to count bonuses and commissions up to 10% to go toward meeting the threshold if these bonuses are paid at least on a quarterly basis.
More good news came with the announcement that NO change is being made in the duties test. We are not going to be forced to go to the California model of percent of time spent performing duties.
Even better news was that the effective date on this does not occur until December 1, 2016 as opposed to the July 2016 date that was expected by many. Everyone will have ample time to prepare for the necessary changes.
The Bad News
The bad news is that this change will still have the following impacts:
The three year indexing could lead to massive jumps in the salary level, with it reaching $55,168 by 2023 and almost $60,000 by 2026, though some economic studies estimate it could actually be closer to $70,000.
The exemption level for highly-compensated employees has risen to $134,004, much higher than the proposed $122,100 level.
What Needs to Be Done
First, this would be a good time to review whether or not people you have classified as exempt are really exempt. Too many employers make the mistake of improperly classifying employees as exempt solely on the basis of the fact that they pay them a salary. Salary is a method of wage payment, not a classification of overtime eligibility. There are numerous companies that have people classified as non-exempt, yet they pay them a salary. Non-exempt employees do not have to be exclusively hourly employees. So even if you have an employee who is going to make the $47,476 salary level, they may not be properly classified based on the nature of the duties required to be classified as exempt. This is not as easy as saying “they make decisions,” as one writer claimed.
By the way, titles don’t count. It is all based on the job description and the actual duties performed. If you have not updated your job descriptions lately, then you may want to do so by having an incumbent participate in the process.
Here are the preparation steps that need to occur:
For those employees where it does not make economic sense to raise them to $47,476, it will become necessary to determine how you will actually record their time worked, because once these employees are declared non-exempt employees (eligible for overtime) you will have to ACCURATELY track their ACTUAL time worked.
Tracking time accurately of newly re-classified employees will also be important. You can do it old school using paper timesheets or you can use new technology, even including mobile devices. The important consideration is finding something your employees will adapt to most easily.
Potential Legal Problems
As you can imagine, plaintiff attorneys’ eyes have lit up with dollar signs. Because this has so widely been publicized, you may have problems with the following, according to Seyfarth Shaw:
Reclassified employees who allege off-the-clock work, missed meal, and rest breaks, or improperly calculated overtime pay.
You need to have a plan as to how this is going to be done. Additionally, you need to have an education agenda. It needs to include upper management and line management since their employees may be seeking information from them.
It is unlikely this will be overturned, even if a new administration comes into place in January. Congressional reversals this year would have to be signed by the President, and that is NOT happening. Perhaps future Congresses or administrations may alter the updates done every three years, but that remains to be seen.
So prepare to make the appropriate changes and plan on the economic impact it may have for your organization.
Michael Haberman is cofounder and senior HR consultant of Omega HR Solutions, Inc., which offers compliance reviews, wage and hour guidance, supervisory and managerial training, strategic guidance, executive advisement, and more. He also contributes articles to the Blogging4Jobs website. He can be reached at email@example.com.