New Overtime Rules Issued
What it Means for You
A change in the rules governing overtime has been coming for two years, with a sneak preview of proposed modifications last year. Broussard Poché, LLP wants to help you get a handle on the new overtime rules. On May 18, the Department of Labor (DOL) issued its new final rules, which become effective on December 1, 2016. The rules will significantly raise the salary level used to determine whether employees are eligible for overtime and will affect more than 4 million salaried employees, according to the DOL.
The Obama administration’s goal was to reset the income threshold to the point it would have reached, with period inflation adjustments, had it not been frozen more than a decade ago.
Under the new rule, the wage threshold test is more than doubling from today’s $23,660 ($455 per week) to $47,476 ($913 per week). The limit will be adjusted every three years beginning January 1, 2020. Employees that have been classified as exempt in the past, who earn less than $47,476 will be deemed non-exempt, and therefore entitled to overtime pay.
Note: Employees’ pay for purposes of determining their exempt/non-exempt status includes nondiscretionary bonuses, incentive pay and commissions, as long as those payments occur at least on a quarterly basis and don’t exceed 10% of the employee’s compensation.
Exempt or Non-exempt?
Unless specifically exempted, employees covered by the Fair Labor Standards Act must receive pay for hours worked in excess of 40 in a workweek at a rate of not less than one and one-half of their regular rates of pay. Not only will employers have to pay the overtime, they’ll also be liable for payroll taxes on it.
Two tests determine whether employees should be treated as “exempt,” and thus not entitled to overtime pay:
- A pay threshold test, as mentioned above, and
- A duties test, under which employees who “primarily perform executive, administrative, or professional duties,” are deemed exempt. In the final regulations, no changes were made to the duties test and their definitions are further detailed in the documents.
Highly Compensated Threshold
In a related change, the pay threshold for “highly compensated” also went up — from $100,000 to $134,004. Employees earning above that higher amount, regardless of whether their jobs would be classified as non-exempt under the “duties” test, can still be treated as exempt, and thus not entitled to overtime pay.
Salaried employees who, thanks to the soon-to-be higher income threshold will be entitled to overtime pay, don’t need to be switched to being paid an hourly wage or to punch a time clock. However, for salaried non-exempt employees below the threshold, it’s important to track time worked to ensure that the hours:
- Don’t exceed 40 hours a week, or
- That employees are awarded the overtime pay they have earned.
Here are some immediate steps to consider in response to the new rules. Start by answering these questions:
- How many of your employees are affected and will become newly classified as non-exempt?
- How many of them routinely work more than 40 hours a week?
- What would it cost you if they continue to work more than 40 hours per workweek and are eligible for overtime?
- What systems do you need to put in place to monitor employees’ hours carefully after the new rules go into effect? The DOL says employers “may use any method they choose for tracking and recording hours” as long as it’s complete and accurate.
Once you get a basic handle on this information, you’ll face more questions. There are no easy answers. Each possible response raises its own issues. For example, if you’re currently paying for all or a portion of employee benefits such as group life and long term care insurance, you could shift those over to “voluntary” (employee paid) status. But doing so would certainly be a takeaway, and many employees would resent it — although perhaps not as much as an actual wage reduction.
“Can We Talk?”
It’s also a safe bet that your employees will have heard about the impending rule change, and they’ll be looking to you for answers about how it will affect them. Broussard Poché, LLP recommends most employers begin engaging employees on the topic, even if you haven’t mapped out the details of how you will respond. An honest “we’re figuring this out” answer can be better than silence.
Don’t stay in the dark about the new overtime rules, take our survey here to determine if your business might be affected. If you need help, give us a call. We’re here for you every step of the way.