Coming Soon: Labor Department Overtime Rules

Coming Soon: Labor Department Overtime Rules

In June 2015, the U.S. Department of Labor, Wage and Hour Division, issued a Notice of Proposed Rulemaking proposing changes to the rules for exempt workers, those generally classified as executive, administrative and professional (EAP) staff, computer professionals,  as well as highly compensated individuals. The effect of the proposed rules would dramatically increase the salary level below which employees would be eligible for overtime protections.

Since 2004 the salary level for EAP personnel which were exempt from FLSA overtime protections has been $455 per week ($23,660 per year), which is a low salary. The U.S. Department of Labor is considering adjusting the minimum salary to index the minimum salary at the 40th percentile of all salaries in the United States for full time work as reported by the Bureau of Labor Statistics. For 2016, the 40th percentile salary is $970 per week or $50,440 per year. As you can see this is more than a doubling of the minimum salary for FLSA exempt staff.

Many HR managers, business owners and lawyers anticipated the rules to take effect by the end of 2015. Recently, the DOL announced that the regulations would be delayed until July 2016 due to the very large number of substantive comments received in response to the proposed rule making. The DOL said they need more time to review the comments.

The delayed implementation of the rules means there is time for employers to prepare. While there may be some small changes to the final rule, it is safe to assume that the minimum salary for overtime protections is going to see a very significant jump.

This DOL Salary Level Worksheet breaks down an annual salary into hourly and weekly wages, and then computes the weekly wage for for employees with 5, 7, and 10 hours of overtime in a week. More on the chart in a bit.


Compliance with the New Rules

In essence there are four compliance models available for business owners to consider: Mechanical Compliance, Data-Driven Compliance, Avoidance Compliance, and no compliance.

Mechanical Compliance. Simply put this model starts kicking workers out the door when they hit 40 hours in a week and hopefully not spending too much on overtime. Business owners are not going to run into any problems with the regulations, but there may be a business cost, particularly in businesses with a large creative or computer personnel contingent when set working hours are not as easy to consider. One of the hallmarks of EAP personnel is that their jobs may be a tad unpredictable and tasks may not get done and client work may be foregone in order to keep everyone under 40 hours.

Data-Driven Compliance. Here, business owners will need good data on their employees work habits. If an executive or a manager or creative professional routinely works 45 hours per week (which is not hard), and their salary is $40,000 per year, it might be worth considering a 20% pay increase to $48,000 to avoid the overtime rule. Taking an example from a graphic design firm. Assume a creative professional routinely bills 38 hour per week to clients. It stands to reason that person is also working close to 45-50 hours per week with other types of work occupying their non-billing hours. If that professional is making $40,000 per year, and they remained at that level, paying them overtime is actually an economic loss. Looking at our chart, that professional is working 47 hours per week, and doing so for most of the year, their annual salary (with the new overtime rules in effect) is actually approaching $50,500 per year. Thus, it is actually cost effective to increase their salary to at least $50,440 and allow them to work as before. The decision to raise pay for the same professional making $45,000 year becomes even easier ($1,092.55 x 52=56,812.60). So a data driven compliance model will look at the performance levels of the EAP personnel to see, if it is more economical to raise pay to the minimum exempt salary or keep individuals at their current salary and pay overtime.

Avoidance Compliance. If a company has a number of EAP personnel with salaries in the mid-40’s but does not have good data on working hours, the company could simply move everyone’s pay to $50,440 and simply not bother with the overtime rule for 2016. This move would, of course, open the employer up to a wide variety of questions and the merits of such pay to some workers. Workers will talk (and are legally entitled to talk) about salary levels. A six year manager now making $51,000 might be happy, until she learns that a 3 year manager is making the same pay.

No Compliance. The choice for business owners to do nothing is always an option, albeit a very risky option. Employees will talk, particularly in the same industry. If a worker at Company A talks to a worker at Company B and discovers that Company B is paying its EAP personnel overtime and Company A is not, it will not take long for Company A worker to find their way to the Department of Labor or state labor department and discover their rights. The costs could catastrophic because not only is that worker entitled to back overtime pay, but if they win, they can get their attorney’s fees paid. Adding another kick to the crotch, the government can and likely will bring an action to recover unpaid withholding taxes and similar costs. If the violation by the non-complying company is considered willful, the penalties can be tripled under the wage payment laws. All those monies have to be added to the company’s own legal bills accumulated in essentially losing cases. The ultimate cost could put the company out of business.

Business owners should take this reprieve in implementation to prepare a compliance strategy and being collecting data on employee work habits. Education of both EAP personnel, HR managers, payroll managers, and owners will be necessary in order to ensure compliance.

The Key Takeaway

The result of the new overtime rules is a massive change in workforce management. No matter what the workers’ duties may be, employers will be required to pay overtime for EAP personnel who do not make the minimum salary for exempt status. While the DOL might alter the final rule (you have a better chance of winning the Powerball), anyone making less than $45,000 per year is almost sure to be considered non-exempt and subject to overtime. Employers and managers are going to have to track the hours of these formerly exempt workers and either send them home at 40 hours or pay overtime for work exceeding 40 hours in a week.

Now is the time to start making the policy and management changes to account for this coming change in the rule. Employers should begin to track time, should be sending workers home after 40 hours of work per week, and start educating their managers on management and compliance.For assistance in reviewing policies, please give us a call.