Prepare for Impact:Steps to Survive New Overtime Pay Rules

Prepare for Impact: Immediate Steps to Survive New Overtime Pay Rules

Posted by Christine Fox on Jul 6, 2016 6:14:34 PM

Starting December 1, new overtime rules kick in that will make millions more employees qualify for
overtime pay.

The changes include a dramatically higher pay threshold that determines whether workers are eligible for overtime at a rate of at least one and one-half times their regular pay. With a few months of lead time, employers need to take a look at their operations and decide how to incorporate the changes.

A change in the rules governing overtime has been coming for two years, with a sneak preview of proposed modifications last year. But on May 18, the Department of Labor (DOL) came out with its new final rules, which take effect 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.

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, and A duties test, under which employees who "primarily perform executive, administrative, or professional duties," are deemed exempt. Regulations spell out those criteria in greater detail.

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.

So, beginning in December, whether employees whose pay falls between $47,476 and $134,004 are to be eligible for overtime pay as non-exempt workers will be determined by the same duties test that has been in place for years.

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.

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:

A) Don't exceed 40 hours a week, or  B) That employees are awarded the overtime pay they have earned.

Overtime pay will need to be determined based on calculating what the employee's salary translates to on an hourly basis for a 40-hour workweek.

Impact Assessment

Here are some immediate steps to consider in response to the new rules. Start by answering these questions:

Q -How many of your employees will be newly classified as non-exempt?

Q -How many of them routinely work more than 40 hours a week?

Q -What would it cost you if they continue to work more than 40 hours per workweek and are eligible for overtime?

Q -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. Suppose, for example, that you don't implement any changes and your payroll costs go up by more than you can manage. You would then need to address questions like these:

Q -What if we hire some part-time people to keep newly non-exempt employees from having to exceed 40 hours a week?

Q -Will it be more economical to give raises to employees who are currently earning somewhat less than $47,467, to get them to the exempt level and avoid having to track their hours and pay them overtime?

Q -Can we reduce or eliminate overtime hours?

Q -Can we lower the salaries or wages of employees who will become entitled to overtime pay so that, when they earn overtime pay, they will wind up earning the same amount as they did before?

Q -Can we make adjustments to our employee benefits program to offset the rise in payroll cost?

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.

No Free Lunch

Another way you could blunt the impact of cutting pay or benefits is to increase non-exempt employees' vacation benefits. However, there's no "free lunch." Doing this could increase the total hours that non-vacationing employees would need to work to cover for their vacationing colleagues, thereby driving up overtime pay.

Any such adjustments would need to be considered in light of the overall competitiveness of your labor market and your total compensation package. Although other employers in your area will probably be facing the same pressures, losing valued employees might cost you more than having to pay some overtime.

Suppose you raise the pay of employees who are near the threshold and routinely work more than 40 hours a week, to keep them in the exempt category. That solves the overtime problem but could have negative ripple effects. For example, one issue is "pay compression," or the narrowing of the spread in pay between high and average performers, veteran employees and new hires, or employees and their supervisors. Some resentment is inevitable.

That, in turn, could put pressure on you to give raises to employees already above the exempt threshold. That might be necessary as a way to restore the original spread and make things "fair" in the eyes of the higher paid workers. This assumes they will become aware of pay changes occurring among their colleagues. While that's not often the case, it's a safe bet that many will figure it out.

"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. For most employers it's probably wise to 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.

"The 2016 overtime law rings in a new era of electronic timekeeping for salaried employees. Many salaried workers haven't punched a clock since Jerry Seinfeld was airing. The good news for those workers who are returning to the time-clock after 10 years: you don't have to stand in line if the app is on your mobile phone." - Alfred Roush, Esq. SPHR, SHRM-SCP, VP of HR Services at CertiPay and Attorney of Roush Law Group

Mr. Roush is dedicated to all areas of Labor and Employment Law relations.  Experience includes representing clients through federal and state court litigation, as well as managing HR professionals in Best Practice development for employer compliance. Mr. Roush is certified Senior HR Professional, and earned his J.D. degree from South Texas College of Law, also holds a Business Administration degree from Loyola University New Orleans.

Contact us today to help begin your club’s impact assessment before the clock runs out.


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Topics: time and attendance, overtime rules, DOL,, FLSA

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