December 1 Overtime Deadline
Author: Michael Cardman, XpertHR Legal Editor
UPDATE: The US District Court for the Eastern District of Texas on November 22 issued a preliminary injunction that prevents the US Department of Labor from implementing and enforcing its new overtime rule. The DOL may appeal the injunction. But for the time being, the overtime rule will not be implemented or enforced.
New regulations from the US Department of Labor will raise the minimum salary for most employees exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) from $455 per week to $913 per week. As a result of these changes, it is estimated that more than 4 million exempt workers will become eligible for overtime pay.
Employers must comply with the new regulations by December 1, 2016. To prepare, an employer should consider the following steps.
1. Identify Employees Who May Need to Be Reclassified
An employer should first get a handle on which of its employees are currently classified as exempt under the executive, administrative, professional or computer employee exemptions (other than computer employees paid on an hourly basis) and currently earn less than $913 per week.
Highly compensated employees (HCEs) earning less than $134,004 in total compensation also should be identified.
2. Develop a New Compensation Plan for Reclassified Employees
The basic options for compensating employees who are currently classified as exempt but are paid less than $913 per week are:
- Increase their weekly salary to $913 or higher to retain their exempt status; or
- Reclassify them as nonexempt and:
- Pay them overtime for any overtime hours worked;
- Reduce or eliminate overtime hours; or
- Reduce the amount of pay allocated to base salary (provided they still earn at least the applicable hourly minimum wage, which could prove difficult in states and cities where the minimum wage will approach $15 in the years ahead) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant.
An employer should weigh not just the labor cost of each option, but also the potential administrative burdens, morale problems and litigation risks that could result from reclassifying exempt employees as nonexempt.
3. Review Wage and Hour Policies and Processes
An employer should be sure to review and update its internal policies on:
- Salary basis;
- Meal breaks;
- Rest breaks;
- Timekeeping; and
- Bonus eligibility.
4. Communicate the Changes
It is essential to develop a communication plan to avoid the kind of confusion and misunderstandings that could lead to litigation.
The Change in FLSA Status for Exempt Employee Letter provides a useful template that an employer can adapt to formally communicate changes to an overtime-exempt employee who must be reclassified as nonexempt.
Likewise, How to Communicate a Change in FLSA Exemption Status to Employees can help employer representatives stay on-message when breaking the news to affected employees.
5. Train the Reclassified Employees and Their Managers
Reclassified employees must be trained about their responsibilities as nonexempt employees. An Employee Handbook is a great tool for communicating company policies about:
Meanwhile, the supervisors of newly reclassified employees should be trained about:
- Important classification-related issues like impermissible salary deductions and exempt duties with the Employee Classification - Supervisor Briefing;
- Working time issues with the Wage and Hour Compliance - Supervisor Briefing; and
- Potential wage and hour issues that can arise if the employer chooses to allow newly reclassified employees to telecommute with the Managing Telecommuters - Supervisor Briefing.
6. Consider Whether to Count Incentive Pay Toward the Minimum Salary Level
Effective December 1, an employer will be allowed to count nondiscretionary bonuses, incentives and commissions to satisfy up to 10 percent of the minimum salary level. So, for example, employees who draw an annual salary of about $40,000 and earn a $10,000 bonus could still be overtime-exempt.
When deciding whether to take advantage of this new provision, an employer should:
- Understand the difference between discretionary and nondiscretionary bonuses;
- Ensure that incentive pay is paid on a quarterly basis or more frequently; and
- Be prepared to pay overtime or catch-up payments to employees whose salary falls short of the minimum level when they fail to earn enough incentive pay.
Other Areas of Concern
While the above steps are of paramount importance to an employer, other areas of concern that should be taken into consideration are:
- Pay compression planning;
- How to treat telecommuters;
- Determining what work habits need to change for newly reclassified employees; and
- Impact on recruiting practices.