Now What? Preparing for the New FLSA White Collar Overtime Exemptions

Now What? Preparing for the New FLSA White Collar Overtime Exemptions

On December 1, 2016, it will be more expensive for employers to take advantage of the Fair Labor Standards Act’s (FLSA) so-called white collar overtime exemptions. Since FLSA violations have always been expensive, employers should begin the process of determining whether and to what extent they will be affected by the new overtime exemption regulations .

The new rules focus primarily on the minimum salary and compensation levels needed to qualify for the FLSA’s executive, administrative, professional, and computer employee overtime exemptions. Employers can ask the following questions to determine the potential impact of the new overtime rules.

Are there any employees classified as exempt under one of the FLSA’s white collar overtime exemptions? If no, you should not be affected by the higher standard salary levels under the new rules. If yes, move on to the next question.

Do any of these employees ever work more than 40 hours in a workweek? If no, you should not be affected by the higher standard salary levels under the new rules. If yes, move on to the next question.

Do any of these employees earn a salary of less than $913 per week? (This works out to $1,826 biweekly, $1,978 semimonthly, $3,956 monthly or $47,476 annually.) If no, you should not be affected by the higher standard salary levels under the new rules. If yes, exemption classifications and compensation practices will need to be adjusted before December 1, 2016 to avoid violating the new rules.

Various adjustments can be made to ensure compliance under the new rules. However, the most appropriate adjustment(s) will likely depend on each employer’s specific circumstances, such as the number of newly-nonexempt employees, their salaries, how often they work overtime and how much overtime they work.

Depending on their circumstances, employers may implement one or more of the following adjustments.

Increase Salaries. The obvious adjustment, and the one likely envisioned by those enacting the new rules, would be to increase the salaries of exempt white collar employees to no less than $913 per week. Though this may be the simplest and least disruptive adjustment, it may also be the most unrealistic. Though salary increases for some employees may be nominal, they can be more than double for others.

[Remember, employees are not exempt simply because their salaries satisfy the increased salary levels under the new rules. Their primary job duties must also involve the kind of work associated with the specific white collar exemption. Employees must satisfy the minimum salary level requirement and the applicable “standard duties test” to be exempt.]

Pay Newly-Nonexempt Employees Overtime Compensation. The alternative to increasing salaries is to re-classify these exempt white collar employees as overtime-eligible employees. If they work more than 40 hours in a workweek, they must be paid one and a half times their regular rate. As with other nonexempt employees, employers must track the number of hours worked each day and the total hours worked each workweek by newly-nonexempt employees. For many, this will be an entirely new experience and will take some getting used to.

This may not be a problem for employees who rarely work or who work very little overtime. These employees can continue working the same number of hours. Though employers will pay more for occasional overtime work, they may still be paying substantially less than $913 per week. The same cannot be said about employees who regularly work or who work a lot of overtime. The cost of paying time and a half to these employees could be very high, and may even approach $913 per week.

Prohibit Overtime. Newly-nonexempt employees can 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 typically work more than 40 hours in a workweek because they have more than 40 hours of work to do. This work must still get done, but someone else will have to do it.

Adjust Personnel, Schedules or Assignments. Those who prohibit overtime may have to make various operational adjustments. For example, workload distribution and workforce scheduling may need to be adjusted to compensate for the loss of overtime work. In some cases, new employees may need to be hired to make up for any lost productivity.

Adjust Wages. If newly-nonexempt employees are allowed to continue working overtime as always, employers will end up paying more money for the same amount of work. Reallocating regular wages and overtime compensation is a way to keep the hours worked by and the amount paid to newly-nonexempt employees largely the same. However, employers may not reduce an employee’s hourly wage below the highest applicable minimum wage (federal, state, or local) or continually adjust wages each workweek in order to manipulate the regular rate.

Employers cannot wait too long to begin planning for the upcoming change. It takes time to properly implement organizational adjustments to exemption classifications and compensation practices, particularly if they are substantial or complex. With all the publicity surrounding the new white collar overtime exemption rules, it’s probably safe to assume that violations will be noticed not only by those employees who are affected by the new rules, but by the Department of Labor too.

Since the Final Rule is sure to bring a level uncertainty and confusion, employers may benefit from having Employment Practices Liability Insurance to protect against various employment-related claims. Limited coverage for wage and hour claims may be available.

Please contact us if you would like to learn more about complying with the FLSA’s new white collar overtime exemption rules.

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