A final Labor Department rule on overtime was announced on May 18 by President Obama and Secretary of Labor Thomas Perez that makes it easier for employees to qualify for overtime pay. The announcement ends months of speculation about how the proposal, which was introduced last July, would affect employers.Companies across a wide array of industries should take strong notice—it could significantly impact the ways in which they do business, and their bottom lines.
The Final Rule, as the Department of Labor calls it, defines and delimits the exemptions for executive, administrative, professional, outside sales and computer employees under the Fair Labor Standards Act. Until now, workers who earned more than $23,660 per year, or $440 per week, were exempt from overtime if they performed managerial or professional duties. Under the final rule, that salary threshold has been increased to $47,476 per year, or $913 per week.
The Final Rule also amends the salary basis test so as to allow employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the new standard salary level.
The effective date of the Final Rule is December 1, 2016. Future automatic updates to the thresholds will occur every three years, beginning on Jan. 1, 2020.
Many experts say that the biggest impact of this change will be felt in retail and hospitality industries, as well as nonprofits, and among middle managers. All told, the DOJ has predicted that the new salary threshold could result in as much as $1.2 billion in additional overtime pay during the first year that it is in effect.
The overtime rule has long been a source of great confusion among employers, and changes to it have been anticipated for some time now. If your company hasn’t already begun planning for this change, it would be extremely wise to start now.
Final Rule Presents Big Challenges for Companies
The Final Rule has implications beyond just wages. For example, money spent on additional overtime must come from somewhere within a company, so employers may be forced to reduce fringe benefits – or even lower raises for other workers – in order to offset those additional costs for newly covered workers.
Then there’s the issue of telecommuters, and specifically, employees who use electronic devices outside of the company offices. Literally or figuratively, there’s no clock to punch at home or on the go, so accurately gauging actual time worked could be difficult. In order to combat this problem, companies could bar non-exempt employees from accessing the company’s computer system outside of the office. Or, they could invest in new timekeeping technologies and processes.
What Should Companies Do?
Your first step should be to identify those workers who will be affected by the Final Rule. If you haven’t been keeping track of work hours for exempt employees, you should start doing so immediately in order to predict the amount of overtime you’ll likely have to pay in the future.
Whatever implications this Final Rule has for your company, we at Skoda Minotti believe it’s sound practice to clearly communicate how and why company policy is changing as a result of the DOL’s action.
We will continue to monitor the latest news surrounding the Final Rule and all other relevant employment issues, and we will share timely updates with you as news breaks.
Specific Information about the Final Overtime Rule under the Fair Labor Standards Act
According to a news release issued by the Department of Labor, “The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.”