New white-collar overtime exemption rules are coming, now what?

On December 1, 2016, employers will have to pay more to take advantage of the so-called white-collar overtime exemptions from the Fair Labor Standards Act (FLSA). To prepare for the upcoming change, employers need to know if and to what extent they will be affected by the new overtime exemption regulations.

The new rules focus primarily on the minimum wage and compensation levels necessary to qualify for the FLSA’s executive, administrative, professional and IT employee overtime exemptions. Employers can ask the following questions to determine the potential impact of new overtime rules before it’s too late.

Are any employees classified as exempt under one of the FLSA’s white-collar overtime exemptions? If not, he shouldn’t be affected by the higher standard salary levels under the new rules. If yes, go to the next question.

Did any of these employees ever work more than 40 hours in a workweek? If not, he shouldn’t be affected by the higher standard salary levels under the new rules. If yes, go to the next question.

Do any of these employees earn less than $913 per week? (This equates to $1,826 biweekly, $1,978 biweekly, $3,956 monthly, or $47,476 annually). If not, you shouldn’t be affected by the higher standard salary levels under the new rules. If so, the exemption classifications or compensation practices must be adjusted by December 1, 2016.

The most appropriate adjustments will generally depend on specific circumstances, such as the number of newly non-exempt employees, their wages, how often they work overtime, and the number of overtime hours they work. Depending on your situation, employers may decide to implement one or more of the following adjustments.

Increase wages. Perhaps the simplest and least disruptive adjustment would be to increase the salaries of exempt administrative employees to no less than $913 per week. Unfortunately, it can also be unrealistic for many employers. Although some salary increases may be small, others may more than double.

Those who choose this option should remember that exempt status requires more than meeting the new minimum wage requirements. Primary job duties remain relevant under the new rules and employees must still meet the applicable “standard duties test” to be exempt.

Pay overtime compensation to newly non-exempt employees. The alternative to increasing wages is to reclassify these exempt employees as eligible overtime employees. Those who work more than 40 hours in a workweek must be paid one and a half times their regular rate. Remember that employers must track the daily and weekly hours worked by all non-exempt employees, including new non-exempt ones.

Paying overtime compensation may not be a problem for employees who rarely work or work very little overtime. Despite paying more for occasional overtime, it would still be less expensive than raising wages. The same cannot be said for employees who work regularly or put in a lot of overtime. Your overtime pay can add up quickly, possibly approaching or even exceeding $913 per week.

Prohibit overtime. Newly non-exempt employees may be prohibited from working overtime. If no overtime is worked, no overtime compensation is required. This option may be simple, but it may not be easy. Exempt employees generally work more than 40 hours in a workweek because they have more than 40 hours of work to do. Your work still needs to be done, but someone else will have to do it.

Personal Adjustment, Schedules or Assignments. Those that prohibit overtime may have to make various operational adjustments. For example, workload distribution and workforce scheduling may need to be adjusted to compensate for lost overtime. In some cases, new employees may need to be hired to make up for lost productivity.

Adjust salaries. Newly non-exempt employees who are allowed to continue to work overtime as usual will end up receiving more money for the same amount of work. Reallocating regular wages and overtime compensation is a way to keep hours worked and amounts paid to new non-exempt employees roughly the same. However, employers may not reduce an employee’s hourly wage below the highest applicable minimum wage (federal, state, or local) or continuously adjust wages each workweek to manipulate the regular rate.

Employers shouldn’t wait too long to start planning. It takes time to change exemption classifications and compensation practices, particularly if they are substantial or complex. With all the publicity, it’s safe to assume that the violations will be noticed not only by those affected by the new rules, but also by the Department of Labor.

To protect against the uncertainty and confusion surrounding the new rules, employers may benefit from having employment practices liability insurance to protect against various employment-related claims. Limited coverage may be available for wage and hour claims.

Employers should discuss the new overtime exemption rules with human resources, payroll/accounting, managers, and supervisors. Specific wage and hour training should also be considered. Contact us if you would like more information on how to prepare for the new white collar overtime exemption rules.

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