Government, Human Resources, and Law

New OT rules will require employer transparency

Employers need to examine workers’ pay, duties to determine where they stand.

November 18, 2016
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As the new federal overtime regulations take effect Dec. 1, area employment attorneys are working to make sure businesses know what they need to do.

Kurt Graham, of Mika Meyers, and Lindsay Raymond, of Smith Haughey Rice & Roegge, have been working with their employer clients to help inform them as thoroughly as possible about the regulations and what they will need to do to be compliant.

Raymond said employers need to work toward analyzing their budgets and workforce in order to make sure they meet the deadline.

“They should do an audit of their workforce and find out which positions are the particularly vulnerable positions and make the decision about whether to reclassify those employees,” she said.

According to the Department of Labor, which issued the overtime ruling under the Fair Labor Standards Act in May, the new rule includes several components.

The 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 subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004).
  • 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.
  • 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.

What this means, according to Smith Haughey’s Raymond, is if employees are not making at least $913 per week ($47,476), they cannot be classified as exempt and are entitled to overtime.

It also means the salary threshold for exempt employees classified as highly compensated goes up to $134,004, and those employees must meet a more stringent duties test that includes examining whether they are considered executive, administrative and professional workers to be classified as exempt.

Graham and Raymond agreed a key piece of the rule employers should keep in mind is the duties test is unchanged. Even if currently exempt employees now fit the salary requirements to be considered as nonexempt, they still will have to pass the duties test.

Practically speaking, the rule change is good news for about 4 million workers in the first year of implementation who now will have overtime pay protections and didn’t before, according to the DOL.

The rule adjusts the threshold for those eligible for overtime to ensure fair pay and to keep up with cost of living increases, according to a statement from the White House.

Graham said employers should be taking a series of steps to effectively implement the change.

He said they need to “identify the people who are going to benefit from the threshold increase, make sure they communicate with those whose status is changing from exempt to nonexempt, communicate to them that they need to track their hours and get supervisory approval for working extra hours and … follow through to make sure they’re compliant with the rules.”

Raymond said for those faced with a decision about whether to convert an employee from exempt to nonexempt, there are a few factors in play.

“You’d have to look at it on a case-by-case basis, because there would be some (employees) that are $100 away from the threshold and some $20,000,” she said. “Financially, it would make sense to keep them nonexempt if you have to bump them up $20,000 to reach the exempt threshold.”

She also said money is not the only concern to weigh in making the decision to reclassify employees.

“There are other considerations, such as employee morale. If an employee all of a sudden has to keep track of every hour, it might make them feel that they don’t have as much flexibility as they once had,” she said.

Raymond and Graham stressed that during the transition, communication is key.

“What would be best for employers would be for them to explain their decisions to the employees when they ultimately decide whether to reclassify employees or keep them as exempt,” Raymond said.

Graham said that one of the pieces of the rule change that was noteworthy is the mechanism that calls for automatically updating the salary and compensation threshold every three years.

The U.S. Chamber of Commerce filed a lawsuit challenging the rule, in large part because of the automatic escalator provision, which it sees as bypassing the rulemaking process in a way not authorized by the FLSA.

Graham said he doesn’t think the lawsuit will be successful, as he doesn’t see it as a viable argument.

“By Thanksgiving at the latest, there will likely be a decision,” he said.

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