UPDATE: Proposed overtime rules blocked by federal court. See newer article.
There’s been much written about the Department of Labor’s new overtime rules and there has been an unfortunate focus on the doom and gloom of implementing these new rules. So long as employers take some easy steps now, they’ll be ready for December 1 and won’t feel like they’re playing catch-up. Below is a brief overview of the rule change and some easy tips for employers to follow. As always, the Reed & Scardino labor and employment attorneys are ready to help you keep your workplace compliant.
The New Rule
Effective Date: The rule doesn’t go into effect until December 1, 2016, so you have time to review your workforce and make necessary adjustments now. But December will be here soon – so get started early. There will be a periodic adjustment to the new salary level every three years, but don’t worry about that right now. Once you complete the tips outlined here, you likely won’t have to reassess until January 2020 at the earliest (and the DOL has promised to give a 150-day notice before each of those adjustments).
Salary Threshold for Exempt Employees: The salary threshold for exempt employees (those who properly qualify as executives, administrative personnel, or professionals) will initially be $47,476 a year/$913 a week. (That’s up from the prior $23,660 a year/$455 a week.)
Highly Compensated Employees: The salary threshold for highly compensated employees also increases from $100,000 to $134,004. Remember, your highly compensated employees still have to meet a minimum duties test, but they likely already do if they were being paid under this exemption.
Bonuses and Commissions: This is an oft-overlooked boon for employers in light of the new rule—you can use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level for exempt employees. To credit bonuses and incentive payments, you have to make them at least quarterly. Remember, though, you can only use the bonus for 10% of the weekly salary amount, so exempt employees would still need to be paid at least $821.70 a week (and you need to make sure that the bonus is going to get employees to the new threshold each quarter).
Full Exemptions: Remember, lawyers, doctors, and teachers are exempt from these overtime/salary minimum regulations. There’s no change to these professional exemptions under the new rule.
What Should Employers Do Now?
There are some steps you should take right now to lower the overall work of complying come December 1 (and ideally save some money). You should audit your workforce and determine how the new rule will affect each individual job in your workplace. You might find that there isn’t as much to do as you originally thought because some or most employees already meet the new rule thresholds! For those employees who may be affected, you should consider whether there are changes to your compensation structure or other strategies that might alleviate the impact of the new rule. Here are some options to consider:
- If you have exempt employees currently making a salary of less than $913 per week, consider raising their weekly salaries to at least $913. As a practical matter, this may work only for employees who are already earning close to the new $913 minimum – significant raises across your workforce won’t make economic sense. But you can alleviate the impact of a salary increase by reducing other components of an employee’s compensation, such as a year-end bonus. Keep in mind that if you give an employee a higher salary to maintain the exemption, you can also require additional work from that employee. But be sure that the employee’s duties clearly meet the exemption—it might be worth providing an updated job description to that employee if you’ll be expecting more from them.
- You can also keep an employee’s salary constant, but make it clear to the employee that the salary is based on an expected number of hours worked each week. By setting the employee’s hours higher, you can effectively lower the regular hourly rate that will be used to compute the employee’s overtime pay. But remember—since the employee is no longer exempt, you must track hours and pay 1½ times the regular rate for all hours worked over 40 in a workweek. With this approach, you must have the employee record all the hours worked each week.
- If you have a good estimate of the overtime an employee will generally work, you can reduce the employee’s salary to keep the employee’s total compensation level constant after the rule change. But before going down this path, you should consider what impact this reduced salary could have on employee morale and workplace turnover. Consider this a last resort. Even if an employee’s take-home pay won’t change much, seeing a reduced base salary won’t look good on paper (and might even be considered an adverse job action that could cause other issues). Check with an employment attorney before choosing to go down this path.
- You can require all non-exempt employees to record all hours worked and seek advance approval to work overtime. Use your disciplinary process (you have a written policy, right?) to ensure compliance with overtime policies—but remember that you have to pay overtime if an employee works it, even if it wasn’t pre-approved. An employee can be counseled or reprimanded for working unauthorized overtime, but you can’t dock the employee’s pay or refuse to pay the overtime hours worked.
Employers should remember that the new rule will have no effect on labor costs if employees don’t work over 40 hours in a week. If your workplace can be re-structured in such a way as to limit or eliminate overtime hours for non-exempt employees, that would be time well spent.
Other things to keep in mind:
- Do you have positions that could be restructured in a way that reduces the need for overtime work? For example, could you use two part-time employees instead of one full-time employee for the position?
- Can you use alternative methods of compensation such as a fluctuating workweek or a day-rate basis? Look to other compensation methods within your industry for ideas and be sure to check in with your employment attorney to be sure the method you’re thinking of implementing will comply with the new rule.
Most importantly, use your time wisely right now. The new rule doesn’t go into effect until December 1. Now’s the perfect time to audit your workplace employee positions and begin implementing changes. It’s also the perfect time to try out methods for recording employee hours (even for exempt employees) to make sure you have a good strategy in place by December. Testing out new procedures and systems now allows employees (and you) time to get comfortable before the rule becomes effective.
There’s no doubt that the new rule may result in some cultural and procedural changes in your workplace, but careful planning and management now will pay (and save) dividends in a few months.
Erik Moskowitz is Director of HR and an attorney at Reed & Scardino where he specializes in civil trial law, including employment law, business law, and commercial litigation. Erik advises employers on regulatory compliance and litigation avoidance and represents individuals and businesses in litigation at all levels of the state and federal court system.