Employers Should Prepare for New Overtime Rules

Ballard Spahr LLP

The Department of Labor (DOL) has submitted its proposed rule regarding the white collar overtime exemptions for a final review to the White House Office of Management and Budget. It is anticipated that the final rule will be issued on or before May 16, 2016, because that is the last day it can be released without giving a new administration the opportunity to overturn it under the Congressional Review Act. Once released, the rule will be effective in 60 days. This means employers may need to comply as early as July 15, 2016.

While we have not seen the final rule, it will almost certainly increase the income requirements for an exempt status, raising the annual salary threshold from $23,660 to at least $50,440 for professional, executive, and administrative employees, and from $100,000 to $122,148 for highly compensated employees. Both of these salary levels are expected to increase automatically in future years. The DOL has not proposed any changes to the duties test, but there is speculation that the final rule may require that exempt employees spend more than 50 percent of their time performing administrative, professional, or executive tasks, rather than rank-and-file work.

For the last few years, we have seen increased DOL activity. This is expected to continue, as funding has been allocated for more field investigators. Plaintiffs' lawyers have also increased their scrutiny of wage and hour practices in search of possible class and collective actions. Employers cannot afford to be complacent about the new rule and must prepare now for these impending changes.

We recommend employers start by considering the following steps:

  • Audit Exemptions. Employers should review their exempt employees, paying particular attention to those earning near or below the anticipated new salary thresholds and keeping in mind anticipated automatic increases. It is also a good time to identify any potentially misclassified exempt employees. With a rule change, reclassifications made this year are less likely to raise flags that an employee was previously misclassified or should have been paid overtime.
  • Be Mindful of Bonuses. Under the proposed rule, discretionary bonuses could not be used to reach the $50,440 threshold. This may change, but for now the exemption review for exempt status should exclude bonuses.
  • Develop a Business Strategy. For each employee or classification affected by the anticipated new rules or identified as misclassified, employers should determine whether business interests are better served by raising salaries, adjusting duties, or reclassifying and paying overtime. An important part of this consideration is determining how many hours the employee actually works. Employers might also consider adjusting the hourly rate so that, even with overtime pay, total compensation basically remains the same. Of course, market factors, such as employee morale and retention, should be part of this evaluation.
  • Plan Communications. Employers should thoughtfully plan how to communicate any changes to employees, particularly if they are changing pay or correcting misclassifications.
  • Review Policies. Employers should review their timekeeping and overtime policies and practices to determine whether revisions will be needed to comply with the new rules and to make sure adequate safeguards are in place to control overtime costs. Employees reclassified as nonexempt may need additional training in this area.

Employers who start planning now will be better positioned to satisfy their obligations under the new rule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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