A Salary doesn’t always mean no overtime. One of the biggest misunderstandings by employers is that paying a salary means companies do not have to pay overtime. For the employer who gets this wrong, the consequences are potentially huge. Employers get ready! The FLSA proposed changes to overtime will likely have a substantial effect on your workforce. BLR, Susan Prince, gives us a view of how the potential changes will look and insight into what it will cost employers.
The federal Department of Labor (DOL) has submitted proposed changes to the Fair Labor Standards Act (FLSA) overtime regulations to the office of Management and Budget (OMB) for review. These regulations will increase the number of employees nationwide who qualify for overtime.
How we got here
On March 13, 2014, President Obama issued a Presidential memorandum directing the Secretary of Labor to begin the process of addressing overtime pay protections to increase the number of workers who would qualify for overtime.
In May 2014, the DOL announced in its Semi-Annual Regulatory Agenda, under the section “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” that the DOL was directing the Secretary to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees.” Proposed rules were originally due out in November 2014 according to the Agenda, but they were delayed.
Thomas Perez, Labor Secretary, has just announced that the proposed regulations have been submitted to the OMB for review. The review process can take anywhere from 30 days to 60 days, or in some cases even longer.
How the changes will look
The DOL changes to the overtime regulations will increase the number of employees nationwide who qualify for overtime in several ways.
First, it is very likely that the DOL will increase the salary threshold required for exemption, perhaps even double it. The current salary threshold for white collar employees is $455 per week. If the threshold increases, more employees will be entitled to overtime.
Second, the DOL may make the duties tests for exemption more difficult to pass. The overtime regulations require that employees perform certain duties in order to be classified as exempt. An exempt administrative, executive, professional, computer, or outside sales employee must have his or her primary duty work that meets the first requirement of the standard duties test for the particular exemption.
A determination of whether an employee passes the primary duty test is based on all the facts in a particular case. The amount of time spent in the performance of the required duties is one key factor.
Third, the DOL may impose a hard and fast minimum 50 percent time requirement on exempt primary duties. Currently, “primary duty” means over 50 percent of the employee’s time. However, time alone is not the only test. For example, an employee who does not spend over 50 percent of his or her time in managerial duties might still have management as his or her primary duty if other pertinent factors are present. These include:
- The relative importance of the executive duties as compared with other types of duties
- The amount of time spent performing exempt work
- His or her relative freedom from supervision
- The fact that his or her salary is greater than the wages paid to other employees for the kind of nonexempt work performed by the executive
If a hard and fast minimum 50 percent time requirement is imposed on exempt primary duties, then these factors will no longer play into the analysis.
Cost to employers
Most employers will be affected by the changes to the FLSA regulations. In addition, most business establishments will incur costs from the changes. What types of costs are we talking about? Some costs will be one-time implementation costs and other costs will be ongoing for an indefinite period of time.
- Devoting time to reading and understanding the new regulations
- Updating corporate overtime policies to comply with the FLSA changes
- Establishing communication between employers and employees about the benefits of qualifying as an exempt or nonexempt employee
- Reviewing job categories and job descriptions to classify them as either exempt or nonexempt
- Paying overtime to those employees who exceeded the current salary threshold of $455 per week, but will fall below the new salary level—yet to be announced
- Increasing the salaries of certain employee groups to raise them above the salary threshold to classify them as exempt
- Facing lawsuits by employees who claim they qualify for overtime under the FLSA
Conduct a self-audit
To help ensure that your company will not be subject to an FLSA claim or a DOL audit, conduct an internal audit once the proposed regulations are released. Review job descriptions to determine whether they are still accurate, reflect the jobs being performed, and reflect the skills necessary to perform the job.
Do you have the required posters hung in the appropriate places in the workplace? That is an easy violation for DOL investigators to spot right when they walk through the doors of your company.
Make sure you have properly calculated overtime for nonexempt employees. And pay past overtime due to employees you have misclassified. Paying them now will be far less expensive than paying them in a DOL settlement or class action lawsuit.