In a paraphrase from the movie “Finding Nemo:” The sun is shining, the tank is clean, and the Department of Labor has finally dropped its final overtime rules.
The wait isn’t completely over; the rules themselves, which expand overtime eligibility for millions of American workers, won’t go into effect until December 1. But don’t worry, there’s plenty to do now in order to prepare.
Digging ahead on the details
The Final Rule mandates that the new minimum salary level (under which employees are guaranteed overtime for work done at more than 40 hours a week) must be $913 per week, which works out to $47,476 a year. For those of you playing along at home, that’s double the current salary threshold for executive, administrative or professional employees of at least $455 per week (or $23,660 in a year). To put it plainly, if you have an employee making under $913 a week come December 1—no matter what their job duties are—they must be paid overtime for any hours over 40 in work week. The threshold for “highly compensated employees” exception will jump from $100,000 to $134,004 a year.
Additionally, that threshold will be changing every three years, and is tied to the salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census region. But what won’t be changing is the duties test. As Corie Tarara writes on the Minnesota Wage and Hour blog:
Regardless of an employee’s salary, an employee may make more than the threshold amount and still not qualify for the exemption. Remember this is called the “white collar” exemption for a reason – think the opposite of Jeff Foxworthy and his Blue Collar Comedy Tour. Though, that is good stuff. Anyway, in order to qualify, the employee must: (1) have a primary duty of the performance of office or non-manual work directly related to the management or general business operations; (2) have independent discretion with matters of significance or supervise two or more employees; or (3) be in an advanced field of science or other specialized prolonged education background, a specialized creative artistic field, a school teacher, or a computer analyzer, programmer or engineer. Under the duties test, the employee must: (1) be paid on a salary basis; (2) be paid at least a fixed minimum salary per week; and (3) meet certain requirements as to their job duties. Thus, while all eyes are on the salary threshold changing, don’t forget that the salary doesn’t matter if the employee is not performing the duties required to meet the exemption!
Preparing for new protocol
So what should employers be doing now to prepare?
“For example, increasing the base salary to avoid overtime obligations under the federal rule may not matter if the employee does not meet the duties test under Connecticut law for the same exemption,” said Schwartz. “This is one of those situations that will require a case-by-case look at specific positions and the interaction between state and federal law. Unfortunately, you’ll probably want to consult heavily with various HR consultants or lawyers specializing in employment law.”
That’s right: The time to start reviewing in order to be prepared for the December deadline is now. And as Eric Hemmendinger and Fiona W. Ong write for The Labor & Employment Report, that means taking a look at each employee and going from there:
This will require employers to review the status of employees who are currently designated as exempt but whose salaries do not meet the new threshold. If an employer wants to continue to classify those employees as salaried exempt, it will have to make sure that their salaries meet the new threshold. In the alternative, employers may choose to reclassify positions as non-exempt, in which case they have a number of choices concerning the method of payment. Additionally, employers will need to train both managers and the newly non-exempt employees they supervise on a range of issues, such as refraining from off-the-clock work and recording actual hours worked.
Don’t forget, in order to exclude an employee from minimum wage and overtime requirements, there are three thresholds to be met: the “salary basis test,” the “salary level test,” and the aforementioned “duties test.” Between those tests there’s possibly still some wiggle room (which is why it’s so important to make sure you’re consulting with HR and employment lawyers), but you have to be careful.
In order to count towards the new threshold, bonuses, commissions and other incentive payments must be non-discretionary (meaning that they are payable if the employee satisfies certain performance criteria, as opposed to entirely at the employer’s discretion) and payable on at least a quarterly basis. Only 10% of the threshold can be met using bonuses, incentive pay or commissions. In order to meet the threshold, employers can make a “catch up” payment within one pay period at the end of each quarter. The regulations do not allow employers to supplement bonuses at the end of the year to meet the threshold.
All in all, this is a big move from the Department of Labor and the Obama administration. The DOL estimates that 4.2 million workers will become newly eligible for overtime, and some other estimates have that number even higher. Come December we’re going to see a major shift in the number of overtime-eligible workers—so make sure you’re swimming with the tide so it doesn’t pull you under this Winter.