United States: Get Ready Now For New Overtime Rules

Important changes to federal overtime rules are right around the corner. The changes will significantly increase the salary basis threshold for the so-called "white collar" overtime exemptions, raising the pay for millions of workers. The new rules, expected shortly, will present challenges for employers ---- particularly employers in the media, entertainment, advertising and hospitality industries, where lower wages can be common for skilled work. Here's a closer look and some steps to take to help bring your company into compliance.

Background

On March 13, 2014, President Obama directed the Department of Labor ("DOL") to update Fair Labor Standards Act ("FLSA") rules in a way that would impact the overtime exemptions of millions of employees nationwide. DOL issued a draft rule in July 2015, and after a public comment period, sent the draft rule to the U.S. Office of Management and Budget this past March. The final rule is expected to be published this month and is expected to take effect 30 to 60 days following publication.

FLSA review

FLSA requires covered employers to pay their non-exempt workers at least the federal minimum wage plus time-and-a-half for all overtime hours, among other requirements. Certain categories of workers are exempt from overtime. The main three exemptions are for (1) executive; (2) administrative; and (3) professional workers, each of whom are not entitled to premium pay for overtime hours. Since 1940, DOL regulations have generally required each of three tests to be met for one of the FLSA white collar exemptions to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary must meet a minimum specified amount; and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations. Currently, the FLSA requires a minimum salary of no less than $455 per week ($23,660 annually). Under the New York Labor law, which governs New York employers, the current salary limit for exempt workers is higher than under the FLSA: currently $675 per week ($35,100 annually). Certain highly compensated employees are exempt from the overtime pay requirement if they are paid total annual compensation of at least $100,000 and if they regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.

Changes to the FLSA

The new proposed overtime rule significantly increases the salary basis threshold. Although employers must wait for the final rules to know the exact amount of the salary basis increase, it is likely to be at or near the level set by the proposed rules of at least $970 per week ($50,440 annually) for "exempt" employees and $122,148 annually for "highly compensated employees." In addition, under the new rule, the FLSA salary basis will be tied to a national wage standard which will be adjusted annually. That means, for example, that employers must continually monitor their exempt employees' wages to ensure that exempt employees have not suddenly become eligible for overtime as a result of an increase in the salary basis threshold. While we noted that the draft rules did not propose changes to the job duties tests, it is possible the final rules will alter these tests as well.

Consider these steps

There will be a lot to do and the deadlines for compliance may be tight. For example, to make cost-effective salary determinations for your company, you may need to take a close look at employee hours. To get a head start on the work, employers should consider the following steps now:

  1. Audit current classification of employees as exempt or non-exempt and correct any misclassifications.
  2. Audit the hours worked by any current exempt employees who may fall beneath the proposed salary limit. When the final rules are published you will be in position to decide whether, for example, to increase certain employee salaries to a point at or above the new threshold - or to pay those employees overtime moving forward. If you decide to keep certain employees above the new salary limit (and not pay overtime), you may need to provide annual raises as the salary limit threshold changes. If you decide to keep certain employees below the salary threshold, you will need to track employee hours and pay overtime for all hours worked over 40 in a work week (including time worked from home, on weekends, and via mobile devices).
  3. Determine how to best communicate changes to employees to maintain morale and reduce litigation risk.

We will review the final rules when DOL publishes them and send another alert with more information.

www.fkks.com

This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.

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