Proposed Overtime Rule Covers More Workers

Proposed Overtime Rule Covers More Workers

 

Allen Smith, J.D. By Allen Smith, J.D. March 7, 2019
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The Department of Labor has proposed an increase in the salary-level threshold for white-collar exemptions to $35,308 per year from $23,660. 

If finalized, the new overtime rule would result in the reclassification by employers of more than a million currently exempt workers as nonexempt and an increase in pay for others above the new threshold. The proposal does not call for automatic adjustments to the salary threshold, does not create different salary levels based on region of the country and does not make any changes to the duties tests.

"Although consistent with expectations, employers will be relieved that the Department of Labor did not propose changes to the duties tests," said Ryan Mick, an attorney with Dorsey & Whitney in Minneapolis. Changes to the duties tests "would have required many employers to undertake a far more complex analysis to determine exempt status for many employees."

Unless exempt, employees covered by the Fair Labor Standards Act must receive at least time and one-half their regular pay rate for all hours worked over 40 in a workweek.

Meeting the salary threshold doesn't automatically make an employee exempt from overtime pay; the employee's job duties also must primarily involve executive, administrative or professional duties as defined by the regulations. 

Reclassification

Reclassification makes sense whenever the minimum salary level is significantly above the salaries paid to currently exempt employees, noted Tammy McCutchen, an attorney with Littler in Washington, D.C.

Employees who are currently classified as exempt from the overtime requirements and have salaries at or above the current salary-level threshold of $455 per week or $23,660 per year might be considered for reclassification as nonexempt to keep wage costs in check. Companies then might set an hourly rate for those employees that would result in the same number of hours worked and the same total pay, even with overtime hours, noted David Klass, an attorney with Fisher Phillips in Charlotte, N.C.

Businesses could implement restrictive overtime policies, limiting employees' authorized overtime, though companies would still have to pay for any unauthorized overtime employees worked. They might discipline employees for working unauthorized overtime.

Companies could reduce newly reclassified employees' hours or use part-time employees to ensure that newly nonexempt employees do not work overtime, he added. Or some newly reclassified workers' tasks might be reassigned to employees whose classification remains exempt.

There may be morale problems in reclassifying workers as nonexempt, said Robert Boonin, an attorney with Dykema in Detroit and Ann Arbor, Mich.

Reclassifying employees from exempt to nonexempt status could result in the loss of fringe benefits, like health insurance coverage, Klass said, as many employers use the exempt/nonexempt distinction as the basis for providing or not providing benefits.

Increased Pay

Not all employees who earn more than the proposed minimum salary will be reclassified as nonexempt. Employers may choose to raise employees' salaries above $35,308 per year to keep them exempt if the employees work more than 40 hours per week, noted Brett Coburn, an attorney with Alston & Bird in Atlanta. 

How employers react will depend largely on the number of hours exempt employees work, Coburn said. "For employees who work well in excess of 40 hours per week, it might be less expensive and less of an administrative burden to increase their salary to get over the new threshold, rather than paying a lot of overtime," he noted. "But for employees who do not work much beyond 40 hours per week, it might make more sense to reclassify to nonexempt."

[SHRM members-only toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws]

Wait or Act Now?

However, Coburn did not recommend that employers reclassify yet. "There is a long road ahead before there is a final rule," he observed. The proposed rule "is just the first step in what will be a lengthy process before we have a new final rule."

Jeffrey Ruzal, an attorney with Epstein Becker Green in New York City, recommended that employers audit their exempt workforces now to determine whether employees qualify for white-collar exemptions under the primary duties criteria of the different exemptions:

  • For the executive exemption, employees' primary duties must be to manage the enterprise or a department or subdivision of the enterprise, and to customarily and regularly direct the work of at least two employees, and the employee must have the authority to hire or fire, or his or her suggestions and recommendations as to the hiring, firing or changing the status of other employees must be given particular weight. 
  • For the administrative exemption, employees' primary duty must be to perform office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers, and must include the exercise of discretion and independent judgment with respect to matters of significance.
  • For a professional exemption, employees' primary duty must be work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or in one of a few other similarly highly specialized fields, such as teaching, computer analytics and engineering.

Employers do not have to wait for the final rule to review the duties. "It is possible that employees currently classified as exempt fail to meet the primary duties tests," he said.

McCutchen said employers should conduct audits of exempt status now, even for employees who earn a high enough salary that they are unlikely to be impacted by DOL's new regulations, "because it is a great time to fix current errors."

[Visit SHRM's resource page on FLSA exemption classification.]

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