Taking a Practical Approach to the New Overtime Rule

Posted: June 1, 2016 | News

Unless they’ve been hiding under the covers trying to recover from the mandatory obligation to provide paid sick leave and the news that minimum wage will increase to $15 by 2022, most California business owners are aware that the U.S. Department of Labor issued its long-anticipated fi­nal rule on overtime on May 18, 2016. Virtually every employer is affected by the fi­nal rule that expands overtime pay, including California employers who have long been subject to this state’s higher (until now!) salary basis test.

Beginning December 1, 2016, the Fair Labor Standards Act’s new overtime rule dictates that an exempt employee must earn $47,476 a year ($913 per week) or more. According to the White House, this change is expected to impact 4.2 million employees nationwide and increase worker wages by an average of $1.2 billion annually. The U.S. Department of Labor anticipates that more than 392,000 workers in California will be affected, more than any state in the union. This increase more than doubles the current federal threshold, which has not seen an increase in over 10 years and even exceeds California’s current annual threshold set at $41,600.

The U.S. Department of Labor has imposed a mechanism to continue to increase the minimum federal threshold every three years, tying it to the earnings of the 40th percentile of full-time salaried workers located in the lowest income region of the country. The White House projects that the minimum earnings for exempt status will rise to over $51,000 per year, with the first update set to occur on January 1, 2010. Employers may have just a short time to adjust, as the increased amount need not be published more than 150 days in advance.

Under the new rule, employers may count non-discretionary bonuses, incentive pay, and commissions to meet up to 10 percent of the threshold minimum, as long as this compensation is paid at least on a quarterly basis. As most employers already know, the salary basis test is just one element that must be met in order to classify an
employee as exempt from the overtime laws. Under the duties test, the nature of the work performed by the employee is vital as well. Although the U.S. Department of Labor had indicated that it might make changes to the duties test, which would have been even more onerous for employers, these anticipated revisions have been abandoned for now.

Employers have a few months to prepare and should take advantage of this time to analyze how they will be affected by, and respond to the increase. The obvious “x” is to raise employee salaries to meet or exceed the new threshold. But if the work does not justify a salary increase, or an increase is unfeasible or impossible, consider some other practical approaches before the new rule takes effect:

• Take this time to analyze the job duties of all exempt positions, especially those that will fall below the new threshold. Employers may find that in addition to failing the new salary basis test, the job duties required of the position fail the duties test as well. If that’s the case, the new rule provides the perfect opportunity to approach an employee and explain that the new rule requires a change in classification. Tying the reclassification to the necessity imposed by the new rule may reduce an employee’s concern and decrease the chance of costly litigation over a possible misclassification of exempt status preceding the change.

• Consider tighter tracking methods for hours worked by non-exempt employees. A formerly exempt employee might think nothing of checking voicemails and responding to emails after-hours. But non-exempt employees must be paid for this time and the new rule will require a change of thinking on the part of employee and employer alike. Don’t allow afterhours work to gain a life of its own. Ensure that there are policies in place that prohibit after-hours work or provide some mechanism that requires accurate reporting of after-hours work to capture all time in the payment of wages.

• Consider whether those employees who are affected by the new rule will be treated as hourly non-exempt or salaried non-exempt. In either case, the employee is entitled to overtime, but an employee may view the impact of the change as less severe with the latter.

Being proactive in the approach to the new overtime rule will allow employers the time needed to make better decisions and be ready as the December 1 implementation date draws near. Please reach out to the employment attorneys at Ferruzzo & Ferruzzo, LLP for additional guidance on the new overtime rule and any analysis required of exempt/nonexempt status.

Colleen M. McCarthy

Colleen M. McCarthy, Esq. is a Partner and chairs the Firm’s Employment Practices Group. She has dedicated her practice to representing and protecting employers, with a particular emphasis on risk mitigation through preventative counseling and sound practical advice. For 15 years, Ms. McCarthy has counseled employers about the complicated employment laws that impact their businesses to ensure that they are in compliance, and to reduce the chance of costly litigation. Ms. McCarthy may be reached by phone at (949) 608-6900 or email cmccarthy@ferruzzo.com