What the Proposed Overtime Changes Mean for Employers

The much discussed and debated update of the Department of Labor’s federal overtime rule may finally be a reality, as the department recently sent its version to the White House Office of Management and Budget for final review and approval.

According to news reports, the department received more than 116,000 comments on the proposed changes, which have earned praise from business groups but opposition from worker advocates, who want to stick with the previously adopted but now-blocked Obama administration’s version.

Once approved, the new rule will raise the salary threshold for the Fair Labor Standards Act’s white-collar exemptions to $35,508 per year from $23,660 (last raised in 2004). The new threshold wipes out the earlier proposed rule, which would have raised the threshold to around $47,500.

Employment-law experts say the new DOL rule represents a middle ground.

“This is a compromise,” says Peter Frattarelli, chair of the labor and employment department at Archer & Greiner. “Although the figures are now lower, the impact is the same.” He added that employees must earn at least $679 per week–which equates to the $35,508 annually–before employers can ever deny them overtime.

Frattarelli adds that, once the new rule is adopted (expected soon), employers will have to make sure that anyone exempt from overtime earns at least the threshold; if not, they will be entitled to overtime.

Carolyn Richmond, formerly co-chair of the labor and employment department (and current chair of the hospitality practice group) at Fox Rothschild, also characterizes the proposed rule as a compromise. Regardless of which rule made it into practice, she adds, employers “will certainly see a significant increase in labor costs in many parts of the country.”

Richmond explains, however, that in certain states the salary level is higher than that used in the proposed federal rule–for example, in New York, the threshold is $48,500–so employers operating in those states must comply with state laws.

“Given the amount of attention and prep time employers went through in 2016–right up to the wire–we do not expect this to be a big surprise,” Richmond says. “However, for employers in many parts of the country, this is a big increase and will likely lead to reductions in hours and job consolidations.”

Frattarelli says HR leaders need to examine the salaries of all their exempt employees–that is, all employees whom an employer has decided are not entitled to overtime–to ensure their salaries are above the threshold. If not, employers would have to either raise their salaries above this new threshold, or start paying those employees overtime, or time-and-a-half for every hour worked over 40 hours in a pay week, in most cases. For instance, there is a recent related DOL proposal regarding overtime for employees with fluctuating work schedules.

“The threshold change may also require employers to start tracking employee hours, with time clocks or time sheets, in the event their time was not being tracked,” he says, adding that, while there is no firm date for when these rules go into effect, many estimates suggest January 2020.

According to Richmond, HR leaders must understand how their business handles reclassifications, as well as existing policies and practices, explaining that the change from exempt to non-exempt has two significant effects: labor costs and the human element.

“Many employees do not feel comfortable going from exempt salary to non-exempt–they view it is as a demotion, and morale decreases,” she says. Additionally, employers have varying policies and benefits for exempt and non-exempt employees, so understanding those differences now is imperative.

“Getting over the human-element hump should not be minimized,” she says. In addition, employers should start reviewing hours, schedules and anticipated overtime hours for reclassified employees.

Both experts say that employers who actually did make changes to comply with the proposed Obama rule, and kept those changes in place, won’t need to do much.

“But, my sense is that many employers held off while they waited for the legal decisions to be made and the November 2016 election results,” Frattarelli says.

“Many employers had already done the analysis, budgeted and were ready to go in 2016. While that is still the framework, times change,” Richmond adds. “Financial situations could have a dramatic effect on affordability.”

In addition, she says, jobs always change so it’s smart not to rely on a duties analysis from three years ago. “Unfortunately, there is a lot of duplication, but it’s necessary to get this right,” she says.

Finally, Richmond says, long-term ramifications of complying–or not complying–with the new rule are significant. For one thing, employers who don’t reclassify the appropriate individuals risk lawsuits, including class actions.

“The statute of limitations under the FLSA is up to three years, and it is very hard to properly assess overtime owed if a business did not fix the problem now and start by having the right employees clock in,” she says.

Frattarelli notes that there is always the possibility that the final rule will be challenged in court, as is what happened with Obama administration’s proposed rule. Yet, that was a Republican-led effort, and it is certainly less likely that there will be a legal challenge to the current proposal, given the changing political scenario.

“If there is a legal challenge, the courts would have to decide if these revisions are significant enough to justify blocking them, which was the reason behind the Obama rule being blocked,” Frattarelli says.

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Tom Starner
Tom Starner is a freelance writer based in Philadelphia who has been covering the human resource space and all of its component processes for over two decades. He can be reached at hreletters@lrp.com.