BB&K In The News

BB&K Attorneys Cynthia Germano and Thomas O’Connell Discuss What Employers Must Know to Comply with New Overtime Rule

By Cynthia Germano and Thomas O’Connell

The U.S. Department of Labor recently updated the regulations governing which executive, administrative and professional employees (“white collar workers”) are entitled to the Fair Labor Standard Act’s minimum wage and overtime pay protections.

For more than a decade, the salary threshold for white collar workers stood at $455 per week ($23,660 per year) – or approximately the 20th percentile for a full-time salaried employee. However, beginning Dec. 1, full-time salary workers making less than $913 in weekly pay – or $47,476 a year, an amount equivalent to the 40th percentile of earnings – are entitled to overtime compensation for any work done over 40 hours in a week.

This rule change also mandates that this threshold automatically increase every three years, beginning in January 2020, to match the 40th percentile of full-time salaried workers in the lowest-wage Census region. Pursuant to this standard, the Department of Labor estimates that in 2020 the threshold will increase to $1,005.15 per week ($51,268 per year).

The Department of Labor acknowledges that this rule will have a dramatic effect on employers. The Department estimates that 4.6 million workers exempt under the previous salary threshold will be entitled to overtime protection under the FLSA. As a result, the Department estimates that the average direct employer costs will total approximately $239.6 million per year. Additionally, the it estimates that this new rule will transfer income from employers to employees in the form of higher earnings at approximately $1.18 billion annually.

The explicit goal of this new overtime rule is to reduce misclassification of overtime-eligible workers and establish what the department believes is the most appropriate demarcation line between exempt and nonexempt white-collar workers.

However, this new rule may actually function contrary to the department’s desires. Our economy has made great strides in recent years to recover from the recession, but there are numerous businesses that have made calculated decisions regarding hiring and salary.

This rule does not create any additional revenue for employers. Thus, faced with the financial realities and risks that this new overtime rule presents, many businesses will be forced to reduce employee hours, salaries and/or their workforce.

In addition, this rule will create numerous compliance issues for employers and force them to make significant changes to their operations.

Employers will need to consider implementing policies that reduce the risk that an employee may perform unscheduled work that goes beyond 40 hours per week. This includes, but is not limited to, policies governing whether and how employees are allowed to work from home, since such work has less or no direct oversight. Employers will also need to perform wage and hour audits to assess whether their current employee classifications remain correct under new salary thresholds. For those employees whose classifications would be incorrect, employers will have a variety of options to consider, including whether to reclassify employees from salary to hourly workers or whether it would be more profitable to raise the pay of those employees over the new salary threshold to avoid paying those employees overtime.

Whatever employers decide, they must do so quickly to meet the deadline. As noted by Forbes earlier this month, the average wage and hour settlement payment costs companies approximately $6.9 million. Businesses simply cannot afford to ignore this dramatic change in the law.

* This article first appeared in The Press-Enterprise on June 12, 2016 Republished with permission.