New Overtime Rules Spell Big Challenges For Business

Statistics show that the median salary increase in the US is a rather moderate 3.1% thus far in 2016, but that doesn’t mean that the cost of labor isn’t about to go up for many businesses—way up.

New regulations issued by the U.S. Department of Labor stand to make potentially millions of previously-exempt workers eligible for overtime pay. Personnel previously classed as exempt executive, administrative, and professional (EAP) employees now may qualify for overtime if the terms of their employment don’t meet increasingly stringent requirements.

Perhaps most notably, the salary level at which EAP employees may become exempt from overtime has effectively doubled, jumping from $455 to $913 per week (or from $23,660 to $47,476 annually). In practice, that means that, for example, a midlevel restaurant manager earning a salary in the mid-thirties and working a few hours above the statutory 40 per week just might be about to become quite a bit more costly.

The Department of Labor (DOL) has issued its Final Rule for new overtime exemptions, focusing on the “white collar” exemptions (executive, administrative, professional, and certain computer employees. These new rules will:

• Raise the minimum annual salary level required for “white collar” exemptions to $47,476 ($913 per week) from the current $23,660 ($455 per week). The salary level test does not apply to doctors, lawyers or teachers, and certain computer employees can be exempt if paid at least $27.63 per hour and meet applicable duties tests.
• Allow employers to use non discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standards salary level (up to $91 per week, or $4,732 total annually), provided that these payments are made on a quarterly or more frequent basis. The remaining 90% of the required new salary level is $822 per week, or $42,744 annually. Together, these total $47, 476.
• Raise the minimum salary for those covered under the “highly compensated employee” exemption from $100,000 to $134,000 in total compensation annually.
• Impose an escalator provision automatically “updating” the above salary levels every three years beginning on January 1, 2020 by tying the levels to certain economic measures.
• Impose no changes to the “duties tests.”

Misclassification of salaried-exempt employees is among the fastest growing civil actions in both federal and state courts. With the final rule, the incentive for employees (and/or the DOL) to claim misclassification has increased. We advise clients to begin assessing whether they wish to pay the higher salaries and/or take other measures. We also advise them to review the duties of their employees that are or may be classified as salaried-exempt to ensure that they meet the various duties tests for the white collar exemptions.

The rules’ applicability is extensive: The DOL estimates that 4.2 million currently exempt workers will become eligible for overtime. In addition, overtime protections will be extended for an additional 5.7 million white collar and 3.2 million blue collar workers.

The new regulations’ effect will be profound on many small- to medium-sized businesses, particularly in areas where prevailing compensation levels fall at or below national averages. Employers will have to wrestle with whether to cut hours, reassign work, increase wages, or simply pay overtime to eligible employees.

Despite the stated intention to simplify both the overtime eligibility rules, the newly-issued rules remain highly complex. The new DOL regulations take effect on December 1, 2016. In the meantime, Trion will assist its clients in adapting to a greatly changed overtime landscape – and implementing strategies to help ensure compliance within it.