The holiday season is almost upon us, and with it comes one of the largest “gifts” the U.S. Department of Labor has ever provided – the new Final Rule on overtime exemptions, which will, in all likelihood, take effect as scheduled on December 1. Unfortunately for employers, this gift is heavily weighted in favor of expanding overtime eligibility for employees, and it does so by dramatically affecting who is an exempt executive, administrative, professional, or highly-compensated employee under the Fair Labor Standards Act.
Although two lawsuits seek to block the Final Rule, and a preliminary injunction hearing in both cases is scheduled for November 16, it is possible that the Rule will either be enjoined only partially or not be enjoined at all. Therefore, if you haven’t started already, you are well advised to begin preparing by understanding the changes, and then determining whether and how those changes might affect your workforce. Ellen Kearns, co-chair of our Wage and Hour Practice Group, discussed the changes in detail here, so my post will focus on what employers should do to get ready.
Probably the most important decision for employers regarding the Final Rule concerns those currently exempt employees who are not being paid at the new annual salary minimum of $47,476 ($913 a week). If an employee is close to the new threshold, the employer may choose to simply give the employee a pay increase to keep him above the threshold and retain the exempt status. However, chances are that you won’t be able to afford that with all of your affected employees. Any employee who is below the threshold — even if her responsibilities meet one of the “duties tests” — will become non-exempt on December 1.
Being “non-exempt” isn’t all bad from the employer’s standpoint. Employers can pay non-exempt employees only for hours actually worked, and have more ability to make authorized and other permitted paycheck deductions (such as recouping advanced but unearned vacation time upon termination of employment).
But of course an employer with non-exempt employees must have a time-keeping system that accurately tracks and records all time worked, and there is the obligation to pay time and a half for all hours in excess of 40 in a single workweek. (Note: The “fluctuating workweek method” may allow you to pay less in overtime, but some requirements apply that won’t work for all employers.)
Recommended Next Steps
While not applicable to every employer, some recommended next steps in preparing for the Final Rule include at least the following:
First, identify which employees should be included in the group that will need to be given raises or reclassified as non-exempt. Any employees treated as exempt must still satisfy the “duties” test and other requirements for the applicable exemption. (The existing duties tests will not be changing.) This can be an excellent opportunity to conduct a self-audit in order to make sure your exempt employees are truly “exempt,” especially given the ever-increasing number of DOL legal challenges for misclassifying employees.
Second, and speaking of audits, this could also be an excellent time to review your standard wage and hour policies and procedures for tracking and recording working time, travel time, and use of mobile devices for work-related purposes during non-regular working hours. Travel time and use of mobile devices by non-exempt employees can result in “off-clock work” if not managed properly. This is particularly dangerous territory with employees who are newly classified as non-exempt and are not used to having to track their time. Special training might be needed for reclassified employees as well as their managers.
Third, develop a compensation plan for reclassified employees. If employees are reclassified, to stay within your budgeted labor costs, you will need to determine the proper rate of pay for these employees as well as the expected overtime hours for which the higher overtime rate will need to apply.