In a long-awaited announcement this week, the U.S. Department of Labor released new regulations requiring companies to give overtime pay to a whole new group of formerly exempt workers. Under these revisions to the Fair Labor Standards Act, it’s estimated that the rules will lead to time-and-a-half pay for all hours logged over the 40-hour workweek for nearly 5 million additional members of the U.S. workforce.
It will take at least a few more months and a public comment period before the rules, which were announced by President Barack Obama earlier this week, become the law of the land. However, companies already can get a pretty clear concept of what is coming, and should think about preparing now for these potentially major alterations to the way they categorize and compensate employees.
“This is going to impact a lot of employees across the country and basically across all sectors and industries in the United States,” Michael Abcarian, regional managing partner at Fisher & Phillips’ Dallas office, told CorpCounsel.com.
Currently, the DOL only requires companies to give overtime pay to exempt workers if their paychecks are below the threshold of $455 per week, or $23,660 per year. This week’s announcement means that the threshold, if approved in its present form, will be raised to $970 a week, or $50,440 a year, which means companies will be faced with the prospect of handing overtime pay to many more workers.
In outlining the proposed regulations, the White House noted that the regulations haven’t been updated since 2004. The fact sheet contends companies are denying workers overtime by inappropriately trying to fit them into another exemption from the FLSA that applies to those who perform professional, executive or administrative duties, and that since exemption is determined based on both duties and salary range, a higher salary ceiling will correct for this.
According to Abcarian, a smart place for companies to start with these regulatory changes is getting their classification houses in order. Do existing practices for determining who is exempt and nonexempt work? Is every worker in the right category? “The first step is figuring out how to get your pay packages right under the new regulations, because if you’ve got mistakes in what you’re currently doing, you’ve got new mistakes under the new regulations,” said Abcarian.
Then in-house counsel will have to help their companies decide what to do with FLSA-exempt employees who now, for the first time, will be above the overtime threshold. One option, explained Alfred Robinson Jr., a shareholder at Ogletree, Deakins, Nash, Smoak & Stewart, is simply paying exempt workers enough to push them above the $50,440 per year line. However, this can be an expensive proposition.
Another possibility is to go with the changes that the DOL has proposed and reclassify relevant employees as nonexempt. Besides having to ensure that these employees’ job duties fit the DOL standards for nonexempt workers and making certain that they get paid at or above the minimum hourly wage and for overtime, companies also will have to focus on the record-keeping responsibilities associated with nonexempt employees. “Then it will be more of a challenge to manage the hours that these individuals who are reclassified actually work,” Robinson told CorpCounsel.com.
There may be other ways out of the problem too, he noted, including an idea floated by the DOL in its proposed rules that would, in certain circumstances, count nondiscretionary bonuses given on at least a monthly basis as part of employee pay, helping more workers exceed the proposed threshold. The DOL asked for more comments on this idea.
Once companies have decided how to handle the situation, they will need to adjust budgets and other projections accordingly. And what will make that even more difficult is that the proposed regulations index the pay range for overtime exemption to other aspects of the economy, meaning that it will most likely continue to rise and rise as the years go on.
Lee Schreter, co-chairwoman of Littler Mendelson’s wage and hour practice group, told CorpCounsel.com that this could cause big problems for companies. They will not only have to re-evaluate their workforce and corresponding budgeting on a frequent basis, she said, but they will have very little time to make decisions, given that the proposed rules only give companies 60 days between the announcement of a rise in the threshold to correct for it.
“Every time this goes up, employers are going to go through the process of deciding whether they want to raise salaries or convert people to being nonexempt employees,” she noted. “That can be a process that take far longer than 60 days.”
Schreter added that there will be both direct costs to companies as a result of the need to get into compliance with new rules and indirect ones as not every employee is going to take kindly to having their status under the FLSA debated and changed. “It’s a perpetual stirring of the employee relationship pot thanks to the Department of Labor,” she said.
Employers also should note that under the proposed regulations, the DOL plans to raise the annual salaries in the “highly compensated employee” category. The guidance also asks for interested parties to weigh in on whether the FLSA duties test, which is used to evaluate whether a worker’s job description makes them exempt or not, should be changed. This hints at more potential shake-ups ahead in the FLSA.
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