In May 2016, the United States Department of Labor published the long-awaited revision to regulations that will change the threshold for when an employer must pay an employee for overtime. The effective date of the new regulations is December 1, 2016, causing dramatic changes for employers. Within the first year of implementation, the update will automatically entitle over 4 million workers to overtime protections, unless employers update the positions to comply with the changes. The impending change will require employers to undertake workforce analysis and planning, including budget forecasting, to determine the best and most cost-efficient way to adapt to the changes to come.
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt from overtime pay. 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, which is $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, which is $134,004 annually; 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.
This means that if the employees currently classified as exempt from overtime and minimum wage make less than the new salary threshold for the applicable exemption, they will become entitled to minimum wage and overtime.
Even though employers should prepare to change the way they do things, some things have not changed. Many employers may not realize it, but the law has required that employees do certain types of work in order to be exempt from overtime pay. Most commonly, those duties fall under the headings of administrative, executive, or professional work – in other words, white collar work. Broadly speaking, exempt employees are supervisors of two or more employees, managers of operations who use their own judgment to make important decisions, or employees whose jobs require some advanced educational degree. However, simply having a “manager” title or working in an office does not mean such an employee is exempt.
Because it seems like the exemption applies only to white collar jobs, it is not always clear how overtime rules apply to the transportation industry. If an employee in the trucking industry has the right duties, then the employer may consider that employee exempt from overtime pay. For example, a safety manager who primarily researches, designs, and implements an overall driver safety program does the kind of work causing him to be exempt from overtime pay (as long as he meets the salary threshold). This is where the new overtime rules come into play.
Under the old rules, a salary may be as low as $455 per week, or $23,660 annually to satisfy the salary threshold part of the relevant exemptions. On December 1, that amount will increase to a minimum of $913 per week, or $47,476 per year. If an employee does not make at least that much, then the employer must pay 1.5 times the hourly rate when the employee works over 40 hours in a workweek.
Interestingly, if certain conditions are met, employers may use bonuses and incentive payments (including commissions) to satisfy up to 10 percent of that $47,476. For example, if an employer pays a bonus or commission that adds up to as much as $4,747 of the $47,476, then the employer only needs to pay an annual salary of $42,729. It is important to note that the rule is not satisfied by the mere opportunity to earn the bonus. The rule is only satisfied if the employee is actually paid the bonus.
These new rules create a new threshold that is simple to understand, but the actual implementation of these rules will present employers with difficult situations. An evaluation of every exempt employee who is below the threshold must be completed to determine whether employees below the threshold should receive a raise to that new level or should become paid on an hourly basis.
For example, consider an operations manager whose annual salary is $45,000 because he is an experienced employee and a newly hired operations manager whose annual salary is $37,000. Raising the salary of the senior employee to meet the threshold and converting the new employee to hourly pay seems to make sense financially. However, that would mean two employees doing the same work would be paid under different schemes. One would have the disadvantage of keeping time records, and the other would have the disadvantage of being asked to work overtime for no more pay. Thus, what seems like a simple change could actually complicate employee relations. Those complications add further nuances and considerations to budget for these changes and create additional issues for human resources.
The upside of the new rules is that it creates an opportunity for employers to address what might be existing problems. In looking at whose pay needs to change, employers might find that some employees are misclassified, and these problems can be fixed. Any kind of change in the workplace requires good communication in order for those changes to be well-received. Both employers and employees will need to accept this change and be flexible as the new regulations take effect.