What You Need to Know About the New Overtime Rules

Starting December 1, 2016, virtually every employer will be facing big changes in the way overtime is calculated for salaried employees.   Although there have been multiple lawsuits filed to stop the implementation of the new rules (together with the introduction of various bills in Congress to delay implementation), the prudent employer should be prepared to deal with some substantial changes.  Violate the rules, and you could be liable for double the back wages owed, plus interest

These new rules involve the Fair Labor Standards Act. The Act generally applies to businesses with two or more employees that either (a) have annual revenue over $500,000 or (b) or are hospitals, businesses providing medical or nursing care for residents, school and preschools, and government agencies.

Let’s start with some basics.  Under the Fair Labor Standards Act employees are classified as “exempt” or “nonexempt.”  Exempt employees are excluded from minimum wage and overtime rules.  Generally exempt employees are paid a salary.  Nonexempt employees, typically paid by the hour, are entitled to 1 ½ times their hourly rates for any hours worked beyond 40 in a given week.

Although the job duties component is not being changed under these new rules, for those not familiar they can be summarized as follows:

“Executive” Employees

    • The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

    • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

    • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

“Administrative” Employees:

    • The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

    • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

“Professional” Employees:

    • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

    • The advanced knowledge must be in a field of science or learning; and

     • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.   

Starting December 1, however, the salary component to qualify as exempt will be substantially increased.  As of that date, employees must be paid at least $913 a week ($47,476 annually) to be deemed exempt.  Non-discretionary bonus and incentive payments (including commissions) may constitute up to ten percent of the new salary threshold, but only if they are made on at least a quarterly basis.

In case you’re wondering, that new amount is based on the “salary level equal to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region, currently the South.”

Also, that salary level is set to be adjusted every three years.

The Department of Labor estimates that as many as 4.2 million workers will be affected.

So what does this mean for you – whether as an employee or employer?  Quite frankly, it means that if you make less than $47,476 a year that you will now be entitled to overtime.

Fleshing it out further, however, many employers are (or soon should be) examining their workforce.  Some employees who were formerly exempt will now be converted to nonexempt employees – especially if increasing salary to meet the new threshold is not feasible.  Some employees well view this as a bruise to their ego.

But there are also more practical consequences, as many employers will now require time-keeping systems for the newly nonexempt.  And, perhaps for the first time in their careers, many employees will now have to use timesheets or other tracking systems.  Because if an employee works more than 40 hours a week the employer will be liable for overtime - even if the overtime was not requested.

Many employees will also have to adjust to new policies.  For example, some employees will now be prohibited from working off the clock – such as checking emails with smartphones after hours to respond to customers or bosses.  Enterprising lawyers have filed suits against large companies claiming violations of overtime rules under this exact situation.  More of the same should be expected under the new rules.

Some employers may boost salary levels to the new threshold, but will decide to reduce bonus potential – which may result in less compensation and a potential decline in productivity.

Other employers may find that, rather than adding full time positions, it’s desirable to handle the slack by hiring part-time employees.  For example, rather than paying John Doe for 50 hours a week (40 straight and 10 overtime), an employer may decide to hire Jane Doe and have them each work 25 hours instead.

Or, employers may just decide to absorb the cost and to pay overtime – but perhaps with a cap on the number of overtime hours that can be worked.

The Department of Labor estimates that the new rules will result in employees receiving a total pay increase of $1.2 billion a year.  And, it also estimates that employers will spend $592 million to comply with the new rules.  That should give you an idea of the magnitude of the changes that lie just around the corner.  Better be sure you are ready.