20 May DOL Sends Employers an Early Holiday Lump of Coal
On Wednesday of this week, the U.S. Department of Labor issued its final rule on the making changes to the “white collar exemption” to the Fair Labor Standards Act, the overtime rule. The rule’s effective date is December 31, 2016, thus the headline of the lump of coal. Although there is time for companies to reclassify employees to be in compliance with the rule, there is also time to address options for employers. The most significant change in the rule is a doubling of the salary level below which employers are required to pay overtime to employees working more than 40 hours per week.
Traditionally exempt employees, or those who were not subject to overtime rules, were designated as EAP, or Executive, Administrative, or Professional employees. These individuals had to have specific job duties to qualify for the exemption. Leaving aside the job duties test, which is unchanged in the new rule, the new overtime rule will affect many service based businesses who previously enjoyed a relatively stable salary and benefits line item on their budget.
Currently the EAP employees making at least $455 per week ($23,600 per year) could be classified as exempt employee and thus not subject the requirement to pay time and a half for overtime.
The new rule sets the salary level at $913 per week ($47,476 per year). Even the mathematically challenged (like lawyers) can see the doubling of the salary level. There is still a duties test that has to be met before an employee can be classified as exempt staff, but the impact for many small business, particularly those who are service based businesses will be significant.
The second, smaller lump of coal in business stockings this year is that the salary level will be adjusted every three years to be set at the 40th percentile of all salaries in the lowest wage Census region. The first adjustment will take place on January 1, 2020. So employers may have to regularly reclassify employers. While that is annoying, it is better than the orignial proposed rule, which included an annual readjustment to the 40th percentile of all salaries in the U.S.
There are many factors for employers to start considering. For example, if you have exempt staff that meets the duties test for an EAP employee making $45,000 right now and they work 45 hours per week regularly, it will almost certainly be cost effective to increase their salary to $48,000 and not have to worry.
Employers will also need to determine ways to accurately track time (and no–punching a time card is not necessary) so that accurate reports are made to the state and IRS about taxes and hours worked. The change will be most immediately felt at this point since the added paperwork burden takes time as well.
Finally, the biggest challenge for employers will be the impact on actual day-to-day operations. When a service business is facing a tight deadline, exempt staff could be counted on to provide a 50 hour week one week and the employer usually granted some sort of compensatory time in the following weeks. Now if that employee is not going to be making enough of a salary, the company will have to either A) send the employee home after 40 hours and possibly miss a client deadline or B) pay overtime at time and a half for 10 hours and potentially lose profit on the project.
I encourage all employers with salaried employees to take the next six months to conduct a review of their staffing, job descriptions, pay practices, and develop a plan for making organizational changes to account for the new overtime rules.
Please call me at 240-351-9941 or send me an email to schedule a consultation and start preparing a plan.