Compliance, Compliance, Compliance!

The New Overtime Rules Place Employers In Compliance Mode.

By James B. Sherman

Wessels Sherman has been deeply involved in all the issues brought about by the DOL’s final rule on overtime exemptions, really from the start. In fact, the comments that we assembled and submitted last fall on behalf of employers in opposition to troubling aspects of the proposed rule, were expressly recognized in the DOL’s preamble to its new rule out of more than 270,000 submissions it received from business groups, unions, individuals and certainly many other law firms.

The Department of Labor released major changes to the Fair Labor Standards Act (“FLSA”) overtime requirements, which has put businesses on notice that they need to assure their pay methods are in compliance by no later than December 1, 2016. So what does a business do when the U.S. Department of Labor abruptly more than doubles the minimum salary employees must be paid in order to qualify as exempt from the overtime requirements of the Fair Labor Standards Act?

The biggest change is obviously the salary increase for exempt workers. The new regulations increase the salary basis requirement to $47,476.00, which is $913 per week. Any individual falling under that salary requirement, will need to be paid overtime at a rate of time and a half for all hours over 40, unless another FLSA exemption applies. Based on the numerous objections that were sent to the DOL regarding the proposed rule, the DOL included a provision allowing employers to include nondiscretionary bonus and incentive pay toward a portion capped at 10% of the new salary threshold. This will slightly help businesses, but overall, the DOL seems to have added the section as an attempt to simply appease the overall opposition to these new rules. Although, the DOL added a “catch-up” pay, which allows a business to ensure that exempt employees who may fall below the new minimum salary in a given quarter, by paying a lump sum to make up the shortfall in salary. Businesses now have less than 6 months to determine how best to address all of the changes brought about by this new overtime exemption rule. For example, is it better to increase an employee’s salary to the new, greatly increased minimum salary to remain exempt, or does it make more sense to convert a particular employee to nonexempt status and pay overtime at 1 ½ times the employee’s regular rate of pay for any hours worked over 40.

So businesses now have only a few short months in which to:

1. assess the extent of the impact of the new overtime rule on their organizations, including how many employees may be impacted (i.e. currently exempt employees who will not meet the minimum annualized salary of $47,476 by the December 1, 2016 deadline);
2. determine whether any shortfalls in salary can be mitigated through existing or new nondiscretionary incentive or bonus pay, up to 10% of the required salary;
3. for currently exempt employees whose salaries fall short of the new minimum and do not meet the new minimum by including allowable non-salary earnings, deciding either to increase their salaries to the new minimum or to convert their status to nonexempt and pay overtime for hours worked over 40 in any given workweek.

If a business can afford to increase its costs, the simplest avenue is to increase the current exempt employees to the new minimum threshold. Perhaps, in order to maintain the employees’ morale, the business keeps the employee on a salary and simply tracks the employee’s hours and any hours worked over 40 are paid on a time and a half basis. Businesses must understand that the exempt employees must still meet the job duties test associated with the executive, administrative, or professional exemption to qualify for the exemption.

What if the business cannot increase its costs? How can a business remain in compliance with the new regulations? A business can start by implementing a policy that employees need permission to work over 40 hours in a week. This will allow a business to control its labor costs associated with time and a half. A business could also use the fluctuating work week pay method. If implemented correctly and by a qualified attorney, a business would be able to control labor costs by paying a fixed salary, but also, only be responsible for ½ time for hours worked over 40. But again, a business must implement the pay method correctly and review every issue necessary to be in compliance.

Businesses must become educated in this area and utilize the numerous exemptions or different pay methods that are allowed under the FLSA. The first step should be to become educated on the new regulations, the second step should be to perform a self-audit or an audit with a qualified attorney on the businesses pay practices, and the last step should be to properly implement the new pay methods. With the media coverage these new regulations have received, it’s a perfect time for a business to modify all of its pay methods without employee becoming suspicious and wondering why things are changing.

Questions? Contact Wessels Sherman.