On May 18, 2016, President Obama and Secretary Perez finally announced the publication of the Department of Labor’s (DOL) final rule updating the overtime regulations, which the DOL says will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.
Defining the Exemptions Under the Fair Labor Standards Act
Back in 2014, President Obama signed a Presidential Memorandum directing the DOL to update the regulations that define which white collar workers are protected by the FLSA's minimum wage and overtime standards.
On July 6, 2015 the Department published a Notice of Proposed Rulemaking (NPRM) in the Federal Register (80 FR 38515) and invited interested parties to submit written comments on the proposed rule by September 4, 2015.
The Department of Labor eventually received over 270,000 comments in response to the NPRM from a variety of interested stakeholders. The feedback the Department received helped shape the Final Rule.
Key Provisions of the Final Rule as of May 18, 2016
According to the DOL website, the Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt.
Specifically, the Final Rule does the following:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The Effective Date of the Final Rule is December 1, 2016
According to the statement released by the DOL,
The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
Although the Office of Management and Budget (OMB) has reviewed and approved the Final Rule, the document has not yet been published in the Federal Register. The Final Rule that appears in the Federal Register may contain minor formatting differences in accordance with Office of the Federal Register publication requirements.
The OMB-approved version is being provided as a convenience to the public and this website will be updated with the Federal Register’s published version when it becomes available.
What the New Rule Means for Employers
According to an article at Fast Company, there are differing opinions on the employer/employee impact of the Rule:
“According to the DOL, these new rules will extend new overtime protections to 4.2 million workers in the United States. The Economic Policy Institute (EPI) has a much larger statistic, saying that these changes will impact 12.5 million Americans. This difference is a result of the DOL not including employees who were misclassified by their employers in its count.
This is because earlier rules exempt "high-level" workers from overtime, and based this on what was called a "duty test." Many employers seized on this opportunity to change job descriptions to make it seem as if lower-level employees were performing more expert tasks, thus exempting them from overtime.
This new rule makes things much clearer: If a worker makes less than $47,476, they are eligible for extra compensation if they work more than 40 hours a week, regardless of their job title or description. The EPI estimates that there are more than 8 million people who will now be more easily classified as eligible for the extra compensation, since they were considered exempt before due to their job descriptions.”
Options for Employer Compliance
Employers have a few approaches available to them for complying with the specifics of the rule. Raising workers’ salaries to make them exempt from the overtime threshold is an option although this obviously incurs significant increases in overhead.
Paying the mandated time-and-a-half overtime for those who do work more than 40 hours is an obvious option, but again, potentially prohibitive. For many smaller employers, the least costly compliance option is to simply ensure employees are not working overtime.
Responses from the Business Community
The changes in the overtime rule have been a source of great alarm in many business communities. According to the Washington Post, for example, many small businesses and employers have said that they will be forced to re-classify some employees from salaried to hourly in order to comply with the changes. A recent post from The National Retail Federation claimed that the rule is a "career killer."
The Credit Union National Association (CUNA) has actively advocated against the rule change. “We are obviously disappointed but not surprised by the final overtime rule,” said Ryan Donovan, CUNA chief advocacy officer.
“America's credit unions work every day to improve the financial livelihood of their members--more than 105 million strong. Nevertheless, the finalized changes add to the regulatory burden that credit unions face and will impair their ability to provide affordable financial services to millions of Americans.”
CUNA is concerned that credit unions could be forced to limit services as a result of changed employment situations or the inability to hire full-time employees.
CUNA sent a letter last week to the Senate Committee on Small Business and Entrepreneurship in advance of its hearing, expressing their concerns, and it has supported the Protecting Workplace Advancement and Opportunity Act (S. 2707/H.R. 4773), which would require the DOL to more fully assess the impact of this rule, especially on smaller entities.
Getting Expert Help to Stay Up to Date and In Compliance
An updated payroll compliance strategy will help your organization meet its obligations, while providing accuracy and timeliness. So take time to understand the laws, prioritize employee and manager salary changes, and maintain accurate record keeping. In this way, you will make compliance a sure thing.
Another key step in maintaining HR compliance and increasing your company's cost-effectiveness is to consider outsourcing. A professional agency such a Accuchex can provide much-needed help with Human Resources needs and questions.
Accuchex is a full spectrum Payroll Management Services provider offering expertise in Time Management, Insurance and Retirement issues, as well.
