Fair Pay for a Long Day: Complying with New DOL Overtime Rule

“In this country, a hard day’s work deserves a fair day’s pay. That’s at the heart of what it means to be middle class in America.” President Obama expressed those sentiments last year in a blog post, after having directed the Department of Labor (DOL) to update the regulations regarding white collar workers’ protections under the Fair Labor Standards Act (FLSA) the year before. 

The wait is finally over. On May 18, 2016, after requesting written input and considering over 270,000 comments received when they released the proposed rule last July, the DOL published a final rule that updates the FLSA overtime regulations, previously updated in 2004.

What does it do?

Primarily, the Final Rule raises the salary levels needed for salaried executive, administrative, professional, outside sales, and computer employees to obtain exemption from overtime pay. The new rule does not change the necessity for affected employees to meet the duties test. Here are a few details as set out in the DOL fact sheet. The Final Rule:

• Sets the standard earnings level of fulltime, salaried workers at $913 per week or $47,476 annually (from $23,600).
• Sets the total annual compensation for highly compensated employees (HCE) at $134,000 (up from $100,000).
• Establishes a procedure for automatically updating the salary and compensation levels every three years.
• Allows employers to use nondiscretionary incentive pay and bonuses to satisfy up to 10% of the salary requirement.

In addition to the fact sheet, the DOL has provided a large collection of documents addressing topics like guidance for employers in the private sector and non-profits, and an overview and summary. You can find additional information and links on the Wage and Hour Division page, Final Rule: Overtime.

Who Benefits?

Any white collar worker who presently meets the FLSA duties test and earns less than required in salary and allowed compensation will be affected by the OT Final Rule. Some demographics will benefit more than others. For example, more than half those affected are women, and Hispanic and Black, non-Hispanic workers each make up 28% of those impacted by the new rule. Employees without a college degree or under 35 years of age comprise groups with a high share of workers likely to gain overtime protection.

What does it mean for employers?

Employers with salaried workers who pass the duties test and who make less than the designated salary of $47,476, have a number of options when complying with the OT Final Rule including: 

• Increase the salary of each employee who would lose their exempt status under the new regulations to meet the new level.
• Pay one and a half times the employee’s salary in overtime for each hour worked above a 40 hours per week.
• Eliminate or reduce overtime hours.
• Reduce the employee’s base pay, staying within minimum wage requirements and bring the employee’s salary up to former rate and meet requirements with overtime, nondiscretionary bonuses, or incentive pay.
• Change affected workers to hourly employees and pay overtime.
• Use a combination of the above.

Each of these options comes with its particular challenges. For example, if an employer decides to increase the salaries of all affected employee, bringing them up to exempt status, the problem of wage compression raises its head. What about the workers who are already exempt? Should their salaries be increased to maintain internal pay equity? Will employers be able to maintain their current workforce numbers?

Eliminating overtime hours can require increased productivity expectations or hiring additional employees. Changing an employee’s designation to “hourly” from “salaried” may mean a loss of some benefits or “perks” attached to a salaried position.  

Using bonuses and incentive pay would need vigilant oversight to make sure that employees are not exempt one quarter and not the next.

For some, the best approach will be to consider each of their eligible employees individually. What works for someone close to the salary requirement may not work for someone whose pay is thousands of dollars less. Being reclassified as “hourly” may be fine for some but problematic for others. 

State requirements

Employers should remember that regulations may vary from state to state. For example, California has its own salary basis and duties tests. California law does not permit employers to use nondiscretionary bonuses, incentives, or commissions to satisfy the salary basis test. The state doesn’t have an exemption for HCE and its overtime requirements are based on an 8 hour workday, not a 40 work week. (For example, if an employee works over 8 hours in a day or on 7 consecutive days, they are paid time-and-a-half. If an employee works more than 12 hours in a day or more than 8 hours on the seventh consecutive day in a workweek.)

In any case, states may follow their own regulations as long as they are more generous to the employee than the federal guidelines. If they are not, the states must follow the federal standards.

Response to the OT Final Rule

Many, like Jared Bernstein, see the new regulations as a huge win for the middle class. A senior fellow at the nonpartisan research and policy institute, Center on Budget and Policy Priorities, Bernstein spoke before the House Committee on Education and Workforce on June 9, 2016. In his testimony he outlined the need for and effect of the Final Rule in assuring fair workplace policies. He also addressed compliance issues and concerns voiced by some nonprofits.

Not everyone is happy with the new regulations. As reported by The National Law Review, some lawmakers have introduced legislation to hold DOL responsible for pursuing a “balanced and responsible approach to updating federal overtime rules.” Another is quoted as planning to introduce a resolution to block the OT Final Rule.

The Society for Human Resource Management (SHRM) issued a statement on May 18, 2016, and supports the U.S. House and Senate bills mentioned above.

Next steps

No matter what employers think about the new regulations or what approach they take for compliance, the time to study the situation is now. The Final Rule takes effect Dec. 1, 2016. Careful time tracking is necessary to analyze current employee hours, pay scales, and overtime to determine the number of workers affected and scale of the response. That information is crucial when considering various options and deciding which ones are right for your organization.

Using an automated time and attendance system that constantly monitors hours, pay, pay rates, and overtime has multiple benefits. The information will be accurate and always up to date. Data is easily accessible and can be used to create a variety of helpful reports. This is important not only for planning, but also to accessing information if needed for an audit and to stay compliant.