This week the U.S. Department of Labor (DOL) announced changes to federal overtime pay regulations expected to make an additional 5 million workers nationwide–including an estimated 200,000 in Pennsylvania and 130,000 in New Jersey–eligible for overtime in 2016. The proposed regulations would change who is eligible for overtime under the Fair Labor Standards Act (FLSA) now and in the future. Since the FLSA is one of the most far-reaching employment laws, covering millions of employers and well over a hundred million workers, and since wage and hour claims (including class actions) are the fastest growing type of federal employment litigation, employers must take notice of the proposed changes and how they could impact their business.
Background
The FLSA is the federal law that governs overtime and minimum wage requirements. The law requires non-exempt employees be paid 1 1/2 times their regular rate of pay for all hours worked over forty in a work week. While all employees are presumed to be eligible for overtime, the FLSA includes specific exemptions to the overtime requirements. The most popular exemptions to overtime under the FLSA are the so-called “white collar” exemptions–administrative, executive and professional. There is a three-part test to qualify for one of the white collar exemptions: (1) employees must be paid on a salary basis, meaning they are paid a predetermined amount not subject to reduction because of variations in the number of hours worked; (2) employees must be paid a minimum salary of $455 per week ($23,660 per year); and (3) their primary job duties must satisfy certain “duties tests” set forth in DOL regulations. These “job duties” tests vary depending on the exemption sought.
The FLSA also exempts certain “highly compensated” employees from overtime. To qualify for the “highly compensated” exemption under the current regulations, employees must be paid at least $100,000 per year (not including insurance cost or other fringe benefits), must perform office or non-manual work and must meet at least one of the exempt duties of an exempt executive, administrative or professional employee.
The salary requirements in the FLSA have been changed only seven times since the FLSA was enacted in 1938. They were last adjusted in 2004. Since the salary and compensation minimums have not kept up with inflation, the percentage of employees eligible for overtime has dramatically decreased over the years. According to the DOL, only 8% of full-time salaried workers currently fall below the salary threshold for the white collar exemptions. The DOL wants to set the standard for the white collar exemptions at the 40th percentile of weekly earnings for full-time salaried workers and the highly compensated employee exemption to the 90th percentile of weekly earnings for full-time salaries workers.
The Changes
Three key changes to federal overtime law are proposed. First, the weekly minimum salary to qualify for one of the so-called “white collar” exemptions (administrative, executive and professional) would more than double from $455/week to $921/week in 2015 and $970 in 2016. This means first line supervisors and other employees currently covered by the executive, administrative or other white collar exemptions making less than $921 per week ($47,892 per year) would suddenly be eligible for overtime–regardless of their job duties. Clearly this proposed change will have the greatest impact on the service industry, but its impact will be broader than that. Many companies have supervisors, managers or administrative staff (such as human resources personnel, financial managers, etc.) who make more than $455 per week, but less than $921. Under the proposed regulations, these employees would now be entitled to overtime for all hours worked over forty and would be required to track all hours worked.
The second proposed change would increase the yearly salary required to be exempt for overtime as a highly compensated employees. That annual salary “threshold” would increase from $100,000 to $122,148. Employees making less than $122,148 in 2016 would be changed from exempt to non-exempt, thereby being forced to track all hours worked and becoming eligible for hours worked over forty in a work week.
The DOL estimates that these changes will affect 4.6 million workers in the first year. The changes will also require employers to revise compensation structures and work schedules. Additionally, the changes will also require employers (and employees) to start tracking the hours worked for employees previously paid salary.
Finally, the regulations would create a mechanism to automatically update the salary and compensation level without requiring action by future administrations–basically an auto-pilot for increasing the levels in the future. This change seeks to keep the level of employees covered by the white collar exemptions to the 40th percentile of weekly earnings for full-time salaried workers and those covered by the “highly compensated” exemption to the 90th percentile. Thus, the minimum weekly salary in 2016 for the white collar exemption would automatically increase to $970 per week ($50,440 per year) and would continue to increase in the future.
Clearly, these changes will be far-reaching and will require employers to re-evaluate employee classifications and pay practices.
Steps Employers Should Take Now
First, it is important to note that these are proposed regulations and nothing has changed in the FLSA regulations as of yet. There will be a public comment period until September 4, 2015 and following that, final regulations will be enacted. Because the changes proposed are to federal regulations (not statutes), and because the FLSA itself does not define the the administrative, executive and professional exemptions, Congressional approval is not required before the changes to the regulatory definitions are enacted. Thus, employers should begin preparing now. Suggested actions include:
- Review your pay practices and employee classifications. Do you have written job descriptions and are they up to date? Do they accurately reflect the actual duties being performed by the employees? Will employees exempt under the current regulations still be exempt under the new regulations? Could the employee qualify for another overtime exemption that does not include a minimum salary requirement, or could the employee’s duties be changed to make them qualify for such an exemption? Consider having your job descriptions reviewed by a qualified employment law attorney who can provide a third party analysis based on existing law and the proposed changes.
- Prepare to convert employees currently making less than $921 per week (or $122,148 per year for highly compensated employees) to overtime-eligible, non-exempt employees. In order to minimize the additional expense related to this conversion and keep total compensation close to the current salary, employers will want to evaluate the number of hours these employees work, whether those hours fluctuate, and how those hours can be tracked. Review budgets to determine if adjustments need to be made to take the increased labor costs into account.
- Review work schedules and work flow needs. Will converting currently exempt employees to non-exempt, overtime eligible employees require hiring of additional personnel?
- Review your processes for tracking hours worked. The changes in the law will mean that employees who were formerly salaried, but are changed to hourly, non-exempt will be required to track all hours worked. This may be difficult to implement and require additional training and the implementation of better time tracking systems.
- Review your employee handbook and/or personnel policies. It may be advisable to revise policies regarding approval of overtime, after-hours work, email and/or “Bring Your Own Device,” given the increased number of hourly, non-exempt employees covered by those policies. In addition, supervisors may need additional training about work time, after hours or off-site work and time tracking. Remember, the FLSA requires non-exempt employees be paid for all hours worked, whether approved or not.
- Prepare employees who may be converted from exempt employees paid a salary to non-exempt, hourly employees. Many employees take pride in being salaried and may resent and resist having to track their hours. The FLSA requires that employers pay employees for all hours worked. Resistance to proper time recording practices could result in employee management issues as well as overtime liability.
- Employers must remember that these changes are to the federal laws and that states have their own wage and hour laws. State laws may provide impose greater restrictions on employers or may contain different tests for exemptions from overtime, or the calculation of overtime. Thus, employers must be mindful to comply with state laws in addition to the FLSA.
- Employers should hire qualified counsel to assist with a general wage-and-hour audit or to review particular job positions and ensure that hidden compliance issues do not catch them by surprise.
Companies should also be prepared for an increased focus on their pay practices, worker classification and employment policies now and in the future. News coverage of the overtime rule changes may prompt employees (and independent contractors) to question their employment classification. There is an army of plaintiff’s side law firms ready to assist these workers with potential claims. Even without the increased scrutiny and press, wage and hour lawsuits (including class actions) are the fastest growing type of employment litigation. There is little doubt that will continue at an even faster rate. Moreover, the DOL will be monitoring employers for non-compliance and has doubled the number of investigators since 2008, making it ready to conduct audits to monitor compliance with its regulations.
Questions?
If you have any questions or would like more information about the changing overtime laws, state overtime laws–or any other employment matter, please contact Julie Kinkopf, Esquire at 610-660-7786 or julie@kinkopflawfirm.com. You can also find previous articles written on the proposed overtime changes here and here. Additional articles regarding employment matters can be found here. We know this is a confusing area of the law and are here to help protect you and your company from liability.
Julie Kinkopf, Esquire is principal of Kinkopf Law LLC and is an accomplished attorney who has represented employers for over 15 years. Ms. Kinkopf helps businesses develop sound employment practices and provides training to supervisors and employees designed to avoid litigation and government audits. She also represents employers before various governmental agencies as well as in state and federal courts in post-employment litigation, including discrimination, retaliation, pay disputes and non-compete/trade secret matters. More information may be found at www.kinkopflawfirm.com or www.linkedin.com/in/juliekinkopf/
Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create and attorney-client relationship.
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