Human resources departments are preparing to work overtime to help their companies comply with new rules that will make an additional 4.2 million American workers eligible for overtime pay.
The Wage and Hour Division of the U.S. Department of Labor finalized rules on Wednesday, May 18, that will significantly expand overtime pay eligibility to white-collar workers.
The rules are a result of a directive by President Barack Obama in 2014, calling on the DOL to update regulations defining which white-collar workers are protected under the Fair Labor Standards Act’s minimum wage and overtime standards.
Effective Dec. 1, salaried workers who are paid $47,476 or less annually will be eligible for overtime pay. Previously, those salaried workers would have had to make $23,660 a year or less to be eligible.
The increase is the first since 2004.
The rule also updates the total annual compensation for highly compensated employees, subject to a minimal duties test from $100,000 to $134,004 annually.
The new rule also calls for automatic updates to eligibility every three years.
Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage U.S. Census region. The threshold for highly compensated employees will increase to the 90th percentile of full-time salaried workers nationally. Those numbers are estimated at $51,168 and $147,524 in 2020, respectively.
The final rule does not make any changes to the “duties test,” which is used alongside the salary test to determine if workers are exempt from overtime pay based on their job functions.
The DOL projects the rule will put more than $1.2 billion annually into workers’ pockets.
Rebecca Strauss, attorney at Miller Johnson, said the new rules will have a big impact on employers and they need to start preparing now for how they will handle the changes. She noted the rules differ from those proposed in July 2015, so employers who may already have begun preparing will need to familiarize themselves with the final rules.
“The impact of this is going to be very large,” she said. “For the HR community that we work very closely with, it’s not the final dollar amount that is causing them the most amount of stress, it’s the day-to-day impact of this rule, communicating the change to people who will be changed from exempt to nonexempt. It’s the increased managerial oversight because, now, managers are going to have to keep track of when people are working more than 40 hours.”
She added, “There may be a shifting of responsibilities. There may be a redesign of people’s job duties to make sure they can get their jobs done in under 40 hours.”
Strauss said companies will have to make decisions on how to track employee hours to ensure compliance.
“There are lots of ways to keep track of whether people are working overtime,” Strauss said. “It doesn’t have to be a time clock. It can be employee reported.”
Employers also need to decide if they want to raise the pay of their salaried workers to meet the exemption threshold so they don’t have to worry about tracking overtime hours or if they want to eliminate overtime hours being worked by employees now eligible for overtime pay.
Strauss said employers have a handful of options on how to handle the new rules and should begin considering those options now. She provided a series of recommendations for employers to prepare for Dec. 1.
First, she said, employers should take inventory of who in their workforce falls within the new eligibility threshold. Then, employers need to think about their compensation plan.
She said in determining whether to raise these employees’ pay to retain exempt status, employers must take into account that the salary threshold is going to change every three years.
For employees who remain nonexempt, employers must decide if they will allow them to work overtime, or if they want to reduce an employee’s base salary to be able to meet any overtime hours worked at the same rate as before.
Employers also need to develop an effective tracking system, and also consider policies for laptop, mobile phone and other technology use outside of office hours.
Finally, she said, employers will want to develop a communication plan for all of their employees: “The employees who will be affected, as well as managers and executives who will be making budgetary decisions and who will have increased managerial duties.”
While Republican lawmakers may mount a challenge in an effort to prevent the rules from going into effect, Strauss’ recommendation to clients is that they don’t wait to see how the politics play out and instead stay ahead of the curve by preparing their company for compliance.