How Employers Should Prepare for the New Overtime Rules

by Laura Pokrzywa

Now whatAs we detailed in last week’s post, the Department of Labor’s new overtime rules have been announced and go into effect on December 1, 2016. Now that we all know what to expect, the time has come for all employers to carefully prepare for the change.

The first step in that process is to ensure that your organization is fully compliant with the current rules. As you conduct your audit, consider these questions:

  1. Are all your employees properly classified as exempt or non-exempt according to the current rules, and are they being paid accordingly?
  2. Are all your non-exempt employees accurately tracking all hours worked?
  3. Do your non-exempt employees know that they are never allowed to work off the clock?
  4. Do you have a Salary Basis Policy that clearly spells out the very limited circumstances when a deduction may be taken from your exempt employee’s salary?
  5. Do you have written policies that give all your employees direction for reporting possible errors in their pay?

If your audit reveals any misclassifications, failure to properly pay overtime due, improper deductions being taken, or inadequate policies, address the issues promptly.

Once you have established that all your employees are properly classified under the current rules, you will need to decide who may need to be reclassified or have their pay adjusted under the new rules. Here are some quick considerations to help you.

Who is impacted?

now what1The new rule specifically applies to the white collar exemptions listed below. The duties tests are listed for your convenience. Please note, for each of these exemptions, the employee currently must be compensated on a salary basis at a rate of not less than $455 per week. Of course, that will be increasing to $913 per week as of Dec. 1, 2016. (For more detailed information on each of these exemptions and on the salary basis requirements, visit the DOL’s website for free downloadable Fact Sheets).

  1. Executive Exemption:
    a. The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
    b. The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
    c. The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
  2. Administrative Exemption:
    a. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
    b. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
  3. Professional Exemption (Learned):
    a. The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
    b. The advanced knowledge must be in a field of science or learning; and
    c. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
  4. Professional Exemption (Creative):
    a. The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
  5. Highly Compensated Exemption:
    a. Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more which must include at least $455 per week paid on a salary or fee basis (increasing to $134,000 annually with at least $913 per week paid on a salary or fee basis on Dec. 1, 2016), are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
Who is NOT impacted?

Employees that are properly classified as non-exempt or those properly classified as exempt but who fall under an exemption other than the white collar exemptions listed above (such as: Computer-related Exemption, Outside Sales Exemption, Commission Exemption, or professional exemptions such as Teachers, Doctors and Lawyers) are not impacted by the new rule. Their exemption requirements will remain unchanged.

What are the options?

now what2If your employees meet the duties test for one of the impacted classifications and if they are correctly classified as exempt, but are not at that new minimum salary requirement, you will need to take action by the December 1st effective date. Your options include:

  1. Increase their salary in order to continue their exempt status; OR
  2. Reclassify them as non-exempt, requiring them to begin tracking their hours, and:
    a. pay them on an hourly basis with overtime for all hours worked over 40 in a workweek; OR
    b. reduce that employee’s hours to avoid overtime (possibly reassigning work); OR
    c. reduce their current pay such that the overtime pay you will now owe them will bring them back up to their current level of pay; OR
    d. continue to pay them their current salary PLUS overtime pay for all hours worked over 40 in a workweek.
Are there any other considerations?

If you decide to change the employee’s status from exempt to non-exempt, you should remember:

  1. That employee should receive training for proper timekeeping requirements. If their role involves travel, be sure to cover which travel time is considered compensable time for proper reporting.
  2. Your employee may exhibit morale issues as they may have a sense of “demotion” or concerns for no longer having a steady, predictable income. Consider now how you might help them receive the news.
What else should I know?
  1. The new rule provides for an automatic increase in the minimum salary level every three years. The next increase will be January 1, 2020 (the minimum salary requirement is estimated to be $51,168 by then, and $147,524 for Highly Compensated employees). The DOL will announce that increase 150 days prior to the effective date.
  2. Ten percent of the minimum salary level can be paid as non-discretionary bonuses, commissions or other incentive payments (this does not include discretionary bonuses and does not apply to your Highly Compensated employees).
  3. On March 17, 2016, identical bills were introduced in the House and in the Senate (both titled: “Protecting Workplace Advancement and Opportunity Act”) which would nullify the new rule. Both bills are currently being reviewed by assigned committees. If passed, this effort will be subject to presidential veto.
  4. Non-profit organizations will receive no special exceptions to the new rules.

If you have questions as you prepare for the new rule please call us via our HR Helpline (855-873-0374) or email us at HRhelpline@eastcoastrm.com. We will be happy to help.

Disclaimer: The information provided on this web site is for informational purposes only and not for the purpose of providing legal advice. Use of and access to this Web site do not create an attorney-client relationship between East Coast Risk Management or our employment law attorney and the user or browser.

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