The New Overtime Rules Are Here – More Work for Employers to Do Now!

On May 18, 2016, the U.S. Department of Labor released its long-anticipated new overtime pay rules.  These new rules address the minimum salary amount that an employer must pay an employee to satisfy the exemption from the federal Fair Labor Standards Act’s overtime requirements.  The new rules, which go into effect on December 1, 2016, more than double that amount by raising it from $455 weekly ($23,660 annually) to $913 weekly ($47,476 annually).  Employers should begin now to analyze how the new rules will affect their workforce, and in particular how they will deal with their current overtime-exempt employees who make less than $913 weekly ($47,476 annually).

Summary of the New Overtime Rules

1. Under the federal FLSA, certain executive, administrative, and professional employees are exempt from the requirement to be paid overtime.  The new rules increase the minimum salary requirement for those employees.  The new minimum is $913 weekly (which translates to $47,476 annually).

• The “duties test” has not been changed by these new rules.  It is important to remember that an employee who is paid at least the minimum salary is not automatically exempt from the federal FLSA’s overtime requirements.  That employee must also meet the “duties test” for one of the three exemptions (for executive employees, administrative employees, or professional employees).

2. There is currently an additional exemption from the federal FLSA overtime requirements for highly compensated employees.  These employees need only satisfy a slimmed down version of the “duties test” in exchange for being paid a higher annual compensation.  The minimum annual compensation for this exemption has been raised from $100,000 annually to $134,004 annually.  These employees must also satisfy the minimum weekly salary requirement noted above.

• Employers relying on this exemption under the federal FLSA should keep in mind that not all state wage laws recognize an exemption for highly compensated employees.

3. These new, increased dollar thresholds will now be updated automatically every three years.  The first such update is scheduled to take effect on January 1, 2020.

4. Previously, in order to meet the weekly salary requirement, employers did not receive credit for bonuses and other incentive compensation paid to employees.  Under the new rules, for the first time, employers will be able to receive some credit (to meet the $913 weekly minimum) for certain nondiscretionary bonuses and incentive compensation (such as commissions) paid to employees.  These amounts must be paid on a quarterly or more frequent basis (annual bonuses will not suffice) and cannot be discretionary (typical discretionary bonuses paid by employers also will not suffice).  This potential “credit” is limited, however, to 10% of the weekly minimum (in other words, when the $913 weekly minimum is in effect, an employer can only receive credit for $91.30 in bonuses and incentive payments, even if those payments total more than $91.30).

• This new “offset” rule does not apply if the “highly compensated employee” exemption noted above is being relied upon.  Highly compensated employees must continue to be paid at least the full minimum salary amount (which translates to at least $47,476 annually), but nondiscretionary bonuses and incentive compensation can be used to satisfy the remaining compensation needed to bring that employee up to the $134,004 annual minimum.

What Employers Should Do Now

1. If employers have overtime-exempt employees who are currently being paid a salary of less than $913 per week (entry-level employees are the most likely to be impacted), employers must decide how to handle these employees before December 1, 2016.  This may be a difficult decision for many employers.

• An employer could increase the pay of these employees so that they meet the new salary threshold.  An employer may be able to get credit for up to 10% of that amount if it has, or puts in place, an appropriate nondiscretionary bonus or incentive compensation arrangement. 
• This solution obviously increases an employer’s costs.
• This may also affect employee morale, since, if employees who are making less than $913 per week are getting raises, employees who are making more than that are likely to also expect raises to maintain their “status” within their employer’s organization.
• Alternatively, an employer could begin to treat these employees as overtime-eligible. 
• This would increase administration for employers, as they would need to track the hours worked for these employees (as they must currently do for all overtime-eligible employees).
• If the employer decides to change the pay rate or structure for these employees, calculating the new pay rate or structure can be tricky.  For example, to predict costs, the employer will need to make certain assumptions about the amount of overtime that will be worked (or whether the employer will even permit overtime work for these employees). 
• This solution may also affect employee morale, as many employees may view the change from overtime-exempt to overtime-eligible as a demotion.
• Finally, this approach could affect employees’ benefits eligibility, and their ability to work as many hours as is needed to get their current tasks done.

2. The related issue that many employers face is the one referred to as “misclassification.”  This generally occurs when an employer treats an employee as overtime-exempt, even though the employee does not meet any of the applicable “duties tests.”  Given the potential retroactive liability associated with such a misclassification, there is never a good time for the employer to approach the employee and reclassify him or her as overtime-eligible.  Nonetheless, if there ever is a “best time” for an employer to make such a change in order to avoid potential liability, now may be that time, as many employers will be making changes to their overtime and pay structures to respond to these new rules.

• Remember that an employee’s title alone does not determine whether he or she satisfies the “duties tests.”
• This misclassification issue also encompasses employees who are incorrectly classified as “independent contractors” or “consultants” rather than employees.

3. Employers should make sure that they have a clear policy as to when, where, and how often overtime-eligible employees, especially any that are being reclassified from overtime-exempt, can work after hours, outside of the office, and on weekends and days off.  Previously overtime-exempt employees who are in the habit of taking work calls, reviewing and responding to emails, and performing similar tasks during off hours (basically, being responsive and making themselves available to colleagues and clients) may suddenly be entitled to additional pay for such work.

• This issue of electronic communications is one that the U.S. Department of Labor did not address with these new rules, and there is no clear guidance or accepted test for determining what or how much such an employee must do in order for it to rise to compensable work.  For example, would simply checking one’s smartphone or Blackberry for important emails over the weekend be compensable?  Does it matter how many times the employee checks or how long it takes him or her to do so before concluding that there is no work to be done?  This can be a significant issue for employers, even more so for employers who decide to reclassify overtime-exempt employees as overtime-eligible.

4. Employers should keep good records of their workforce analysis and classification decisions this time around, because they can expect to go through similar exercises at least every three years, as and when the federal FLSA thresholds are adjusted (presumably upwards).

5. Employers must also keep in mind their relevant state laws.  The federal FLSA rules set a minimum standard for overtime compliance.  States laws that are more protective in terms of which employees are exempt from overtime will also need to be considered and followed.

6. While there is talk of court challenges to these new rules, and Congress making an attempt to block these new rules, employers should not assume that these efforts will be successful.  Employers should begin to plan compliance now (if they have not already begun).

7. Employers should seek input and assistance of employment counsel, as practitioners expect that these new rules will be followed by an uptick in litigation related to claims of unpaid overtime (as occurred in 2004, the last time the federal FLSA overtime rules were updated).  HR should also be involved in this process.

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Our client alerts are for general informational purposes and should not be regarded as legal advice. If you would like additional information or have any questions, please contact the authors.