The Fair Labor Standards Act (FLSA) dictates federal minimum wage and overtime requirements. On May 18, 2016 the Department of Labor (DOL) issued final regulations, resulting in the first significant change to minimum wage and overtime rules in the past 12 years.
The FLSA requires that employees who work more than 40 hours per week be paid overtime at one and a half times their normal hourly rate unless they are classified as an “exempt” employee. “Exempt” status is defined with consideration of both job duties and the salary threshold. Job duties are defined as certain administrative, professional, executive, etc., functions. The salary threshold is currently set at $23,660 per year ($455 per week). The FLSA also provides an exemption from the overtime requirements for “highly compensated employees” defined as those who earn at least $100,000 per year and meet a duties test.
The new rules are effective on Dec. 1, 2016. The threshold will increase to $47,476 annually ($913 per week) and will automatically be adjusted for inflation every three years. The final regulations allow for up to 10 percent of the salary threshold to be covered by non-discretionary bonuses, incentive payment and commissions as long as these amounts are paid at least quarterly. The final regulations also raise the salary threshold for the highly compensated employee exemption to $134,004 annually. No changes were made to the duties test as previously defined.
The DOL estimated that the increase in the wage threshold will directly affect approximately 4.2 million employees and will result in an extra $1.2 billion a year in overtime pay.
Employers have several options for responding to the changes including:
Pay overtime in addition to the employee’s current salary when necessary.
Employers can continue to pay their employees the same salary. Whenever the employee works more than 40 hours in a week they will receive overtime rates. This approach will be most effective for employees who typically work 40 hours or fewer but have occasional spikes which will require overtime. Employers should budget for extra pay during these periods. Keep in mind that private employers cannot satisfy their overtime obligations by providing compensatory time.
Raise salary and keep the employee exempt from overtime.
Employers may choose to raise the salaries of those employees who meet the duties test to meet or exceed the new salary threshold. This option is most effective for employees who have salaries close to the new salary level and regularly work in excess of forty hours.
Evaluate and realign hours and staff workload to avoid overtime.
Employers can ensure that workload distribution, time and staffing level are managed appropriately to ensure that employees are not exceeding the regularly scheduled 40-hour workweek. Employers may need to hire additional workers to accomplish this objective.
The DOL has significantly increased enforcement efforts in the past few years and lawsuits have become very prevalent. Misclassification can potentially result in a significant liability including back pay and other damages. It is time for employers to begin to assess the impact of these rules on your business and to start the process of establishing an appropriate implementation strategy to respond to the changes. I95