DOL Overtime Regulations Will Impact Employers

The U.S. Department of Labor (DOL) recently issued a Final Rule updating the overtime regulations governing pay under the Fair Labor Standards Act (FLSA).

New Jersey employers should become aware of these new overtime regulations, promptly evaluate how the final rule will impact employee compensation and determine how to address the potential implementation costs.

Under the FLSA, “employees must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and one-half their regular rates of pay, unless they are specifically exempted. The most notable FLSA overtime exemption covers “executive, administrative and professional” employees and is often referred to as the “white collar” exemption. To qualify, employees generally must satisfy certain tests regarding their job duties as well as meet a salary threshold set by the DOL.

As previously discussed on our Business Law blog, President Barack Obama signed a Presidential Memorandum in 2014, directing the Department of Labor to update the overtime regulations. In his directive, the President highlighted that the thresholds of the salary test have failed to keep pace with inflation, only being updated twice in the last 40 years.

The DOL’s final changes to the salary test rules

Some changes made to the salary test rules were as follows:

• Raises the standard salary level for the “salary test” for the exemption at the 40th percentile of weekly earnings for full-time salaried workers, which increases the salary threshold from $23,660 to $47,476 per year;
• Increases the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers ($122,148 annually), which raises the threshold from $100,000 to $134,004;
• Establishes a mechanism for automatically updating the salary and compensation levels every three years to ensure that they will continue to provide a useful and effective test for exemption.

Notably, the DOL did not make any changes to the requirements of the current “duties test,” which is used to determine whether salaried workers earning more than the threshold salary test are exempt from overtime rules.

So what’s next?

It is recommended that a top-to-bottom wage review be conducted to determine what changes to current wage practices and structures may be necessary to accommodate these new requirements.

The DOL’s final rule will take effect on December 1, 2016, with the initial increases to the standard salary level and the HCE total annual compensation requirement starting on that date. According to the White House, the updated overtime rule will extend overtime protections to 4.2 million white-collar workers within the first year of its implementation. Accordingly, it will also have a tremendous impact on employers.

It is recommended that a top-to-bottom wage review be conducted to determine what changes to current wage practices and structures may be necessary to accommodate these new requirements. The fact that a worker goes from being classified “exempt” to “non-exempt” does not mean, necessarily, that such employee will receive more pay. What will change is the need to establish a “rate of pay” and overtime rate while also keeping careful and accurate track of all hours worked in a work week. Newly non-exempt employees must be paid overtime pay for all hours worked in excess of 40.

In some instances, an employer may choose to raise an exempt worker’s annual compensation to maintain such exemption if the cost of such raise is affordable.

There is no “right way” to make these adjustments. It is important, however, that employers engage in a thoughtful review of current pay practices to determine what adjustments, if any, will be necessary. Job descriptions are just one example of where review of terms and adjustment of rates should be considered.

The time to engage in this process is now as the implementation/compliance date is a little more than six months away. However, if you have any questions about this process or need to discuss any labor & employment matters, please contact me, Gary Young.