Getting Ready for the Federal Overtime Rules (Again)

By Jane Kim

Earlier this year, the U.S. Department of Labor (the DOL) proposed new federal overtime rules related to certain exempt employees under the Fair Labor Standards Act (FLSA). The DOL estimates that the changes will impact approximately one million currently exempt employees (those employees who are presently salaried and not eligible for overtime) nationwide. Here is our take on how we got to the new rules, the changes made, what traps to avoid and how to prepare.

How Did We Get Here? Some History

Under current law, which took effect in 2004, employers must pay overtime to employees who both work more than 40 hours per week and earn a salary below $455 per week ($23,660 annually). In 2016, the DOL issued new overtime rules that, among other things, raised the salary threshold for the administrative, professional, executive and computer exemptions, often called “white-collar” exemptions.

Significant changes in the 2016 overtime rules included: an increased minimum salary level for the white-collar exemptions (from $23,660 annually to $47,476 annually, or from $455 per week to $913 per week); an increased total annual compensation requirement for the highly compensated employee exemption (from $100,000 to $134,004); and an automatic adjustment to these salary levels every three years to account for inflation.

As the result of numerous legal challenges, the 2016 overtime rules did not go into effect as scheduled in December 2016 and were ultimately invalidated by a Texas federal district court in August 2017. On March 7, 2019, the DOL issued a new rule proposal to change the minimum salary threshold for overtime eligibility.

The Newly Proposed 2019 Overtime Rules

The DOL’s newly proposed overtime rules set the salary level for the white-collar exemptions at $679 per week, which equates to $35,308 per year. Therefore, subject to limited exceptions, employees with a white-collar exemption status must receive at least the minimum salary threshold ($679/week) in each pay period.

In addition, the 2019 proposed rules include:

• A total annual compensation requirement of $147,414 (up from $100,000) for the highly compensated employee exemption.

• A commitment to periodic reviews of the minimum salary threshold to maintain salaries in line with future wage rates and inflation. Future updates to the rule would be subject to the public notice-and-comment rule making requirements.

• A bonus provision that allows for the inclusion of specific bonuses when determining an employee’s total pay for purposes of the exemptions. Non-discretionary bonuses, incentive payments and commissions that are paid annually or on a more frequent basis can account for up to 10% of the required weekly salary level. Also, employers are allowed to make a final “catch-up” payment (up to 10% of the standard salary level, or $3,530.80) within one pay period after the end of each 52-week period to ensure an employee’s salary level reaches the new minimum level of $35,308. 

Preparing for the Transition

According to the U.S. Bureau of Labor Statistics, the 2019 overtime rules will impact a markedly fewer number of employees than the 2016 overtime rules (about one million workers as opposed to over four million workers). While many employers may still face bumps in the road while making the transition, at least there is time to prepare by doing the following:

• Take the time now to review all of your exempt positions.

For those employees with lower salaries who typically work less than 40 hours per week, converting them to non-exempt and paying overtime for the occasional overtime hours they might work is the logical option. If you identify the employees with higher salaries who work long hours, you may decide that it makes the most sense to increase their salaries to the new standard because this salary increase likely will be less than what you would end up paying in overtime hours.

You may also decide that some currently exempt positions should be non-exempt regardless of whether the positions make $679 a week or more. Because managerial duties are an essential factor in classifying employees as exempt or non-exempt, it would be difficult for a restaurant to claim as exempt a chef whose primary duties include routine food preparation and cooking, and who only occasionally directs line cooks, monitors job assignments and procedures, manages kitchen workers, etc.

• Start having your soon-to-be non-exempt employees record their time.

This will help give you an idea of just how many hours a week they work (which may help you decide what hourly rate to pay them) and will provide the employees an opportunity to get in the habit of accurately recording their time.

• Start talking to your employees about the transition and why it’s happening.

Even in the absence of demotions and job duty changes, some of your previously exempt employees may feel as if they have taken a step backward. Help them understand that the transition is not a reflection of their performance and that millions of employees nationwide are facing the same reality.

• Make sure you have a written policy that warns your employees about working off-the-clock and mandates that they accurately record their time.

Also, decide how you are going to handle after-hours work/communications and implement a written policy. Are you going to take away 24/7 access through computers and smartphones, or are you going to ensure that any after-hours work time is recorded and compensated?

• Consider the “fluctuating workweek” method of calculating overtime.

Using this method results in half-time overtime instead of time-and-a-half overtime. Keep in mind, though, that it is an extremely complicated method to administer.

Traps to Avoid When Making the Transition

Some employers may be thinking, “Can an employer get around the new overtime rules by treating employees as independent contractors?” The answer is an emphatic “no,” unless you want to get in trouble with various government agencies, including the DOL and the Internal Revenue Service.

Be careful when trying to limit your newly non-exempt employees to just 40 hours of work per week. Chances are these employees were working more than 40 hours/week before you reclassified them. Following the status change, your newly non-exempt employees may be tempted to work “off-the-clock” for a variety of reasons, so monitor their time carefully and pay them for any time exceeding 40 hours in a week. 

Also, if you try to limit employees to just 40 hours per week, do not penalize them for working “unauthorized” overtime by withholding payment for their overtime work. The unauthorized work more than likely added value to your business and, more importantly, refusing to pay for overtime work is a violation of federal and state wage and hour laws. Therefore, you should discipline employees for any unauthorized work time (e.g., verbal or written counseling) and always pay them for the time worked. 

Be aware of how your employees use home computers and smartphones. As soon as you reclassify them as non-exempt, your previously exempt employees will no longer be able to work and communicate with you 24/7 without being paid. They now will be on-the-clock, and you should compensate them for anything other than a de minimis amount of time spent on work-related matters, including electronic communications. These previously exempt employees may have the hardest time making the transition to recording their time and will need your help in making that transition, as well as your oversight to ensure that they are accurately recording their time.

Finally, it is essential to note that placing an employee on salary (or assigning a particular job title to an employee) does not automatically exempt the employee from overtime. Under the FLSA, both an employee’s salary and an employee’s duties determine eligibility for one of the white-collar exemptions. Although the new 2019 proposed rules raise the threshold for the “salary test” for exempt status, the “duties test” remains intact under the new rules. This means that if your employee meets the “salary test” but not the “duties test” for a particular exemption status, then that employee is still eligible for overtime. To meet the “duties test,” the employee’s job duties must primarily involve executive, administrative or professional duties as defined in the FLSA. Employers who choose to pay non-exempt employees on a salary basis must still track all of the non-exempt employee’s time and then calculate and pay overtime for hours that exceed 40 in a workweek. 

This transition may not be easy—and waiting until the last moment will only make it harder. The comment period for the newly proposed rules just ended, and President Trump is expected to approve and sign the proposed rules soon. It is crucial to take advantage of this available time and to start planning now.

Editorial assistance provided by summer associate Gray Norton.