United States: Uncertainty Continues To Swirl Around DOL's Overtime Rule As Employers Make Compliance Push

Last Updated: November 23 2016
Article by Michael S. Arnold and Gauri P. Punjabi

As all HR professionals and employment lawyers know (even those currently living under rocks), the Department of Labor's final overtime rule is scheduled to go into effect on December 1, 2016 – less than two weeks from now. The DOL published the rule back on May 18, 2016 providing employers with nearly 200 days to come into compliance. Many have planned accordingly and are ready to go; others are finally focusing on this issue as the deadline nears. At the same time, questions continue to arise over the rule's fate. In this post, we discuss the current state of play along with some compliance tips for employers.

What will happen next?

Quite simply: we don't know. Two events are driving the conversation.

First, a Texas federal judge will decide on Tuesday whether to stop the rule from taking effect. Most commentators believe that the judge will not halt the rule from taking effect (except, possibly with respect to the rule's three-year auto-salary basis update component). But the judge peppered the DOL with difficult questions during the injunction request hearing signaling that he may be headed in a different direction than most commentators believe.

Second, some relatively-unknown, unassuming guy by the name of Donald Trump won the presidential election. To date, President-Elect Trump has not publicly called for the rule's repeal, but he has indicated that he would prefer a small business exception and/or delay part of the rule as applied to certain types of businesses. Next year a Republican-led Congress could pass legislation that modifies the rule to make those changes, weaken it in other ways, or it could go one step further and repeal the rule entirely through various means.

Assuming the court declines to act, it may be difficult however, for a Trump DOL or Republican-led Congress to completely undo what's already been done. Congress could not repeal or make any changes to the rule at least before the end of January, when the rule will have already been in effect for nearly two months. Further, if Congress decides to defer to the DOL on the issue, any newly-proposed overtime rule would be subject to a notice and comment period and therefore take even longer to change. Coupled with the potential political implications of a rule reversal/modification on which voters (including employers) will have become accustomed, substantial changes to the rule may be less likely.

Altogether, it's hard to know how, if at all, the rule will be changed, but we would think at a minimum, the three-year auto-update feature is the most susceptible to elimination or modification. We will have to adopt a wait and see approach, but in the meantime, we continue to urge employers to comply with the rule in its current form. Towards that end, the remainder of this post will focus on some tips to help with that last minute compliance push.

Remind me, what does the rule say again?

Here is a crib sheet:

  • The salary threshold for the executive, administrative and professional exemptions will increase from $455 per week ($23,660 annually) to $913 per week ($47,476 annually).
  • The salary threshold for the highly compensated employee ("HCE") exemption will increase from $100,000 per year to $134,004 per year.
  • Employers can use nondiscretionary incentive compensation to meet up to 10% of the new salary threshold, provided such compensation is paid on at least a quarterly basis. Employers can also make a catch-up payment to maintain the exemption if an employee does not receive enough in nondiscretionary bonuses and incentive payments in a given quarter to remain exempt.
  • The salary basis threshold will automatically update every three years to maintain the salary threshold at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region for white collar workers, and the 90th percentile of full-time salaried workers nationally for HCEs. The first automatic update would take place on January 1, 2020. The DOL will publish updated rates in the Federal Register at least 150 days before their effective date.
  • There is no change to the job duties test.
  • There is no effect on other exemptions, such as the computer professional exemption or outside sales exemption.

For a more detailed summary of the Final Rule, click here.

What about state and wage and hour laws?

We're so glad you asked as many employers are often singularly focused on the Fair Labor Standards Act – a federal law – and forget (or don't even know) that many states have their own wage and hour laws that provide a higher exemption bar.

California is famous for this. Its "primary duty" test is more stringent than the FLSA's, requiring the employee to spend more than one half of his or her time performing exempt job duties. Further, its salary basis test is tied to California's minimum wage, which often increases on a year-over-year basis and which means employers may not meet California's exemptions even though they meet the FLSA's exemptions. We wrote more extensively about California's differences from the FLSA here. New York also recently proposed a gradual increase to its salary basis test that would eventually eclipse the FLSA's salary basis minimum.

What's the big deal – don't I just raise salaries or convert them to OT eligible?

In some ways, the DOL tried to portray this as a simple decision for employers to make: raise salaries or start paying overtime. On the surface it is that simple, but peek underneath and you'll see that this is so much more than a simple compliance decision. The rule impacts different employers differently; some very little, some greatly and everyone else somewhere in between forcing them to make other related decisions that will impact their workforces in different ways. In particular, wholesalers and those in the retail trade, those providing educational and health services, professional and business services, financial institutions, non-profits and those in the start-up community, and those in the leisure and hospitality industries may be impacted far more than others.

Employers must run a cost-benefit analysis that accounts for the overall impact of its classification decisions. And this means more than just accounting for the direct wage costs. There is a host of other cost factors that emanate from this decision, especially as exempt and non-exempt employees often function very differently within a workplace.

Let's say you are considering converting your affected employees to non-exempt – as overtime eligible. One of the first questions you should ask is whether you will be able to control your overtime costs. Think about whether this is an employee who needs 50-60 hours per week to complete their job and complete it well. If the answer to that question is yes, then it may make sense to simply raise their salary and keep them as exempt; or if it does not make sense, then to lower their base salary and allow them to make up the delta through overtime. Or consider whether you can tinker with their incentive-based compensation or reduce some of their fringe benefits to offset some of the wage costs? Or alternatively, consider whether you can reengineer the job so that it can be performed in 40 or fewer hours or if you can add headcount so two or more employees can perform the job while each working fewer than 40 hours.

In making these decisions, you also need to remember that there may be secondary or tertiary effects that could drive your costs right back up. For example, let's say you decide to reclassify the employee as non-exempt, but to offset the overtime costs, you also reduce the employee's PTO accrual rate. How would the employee react to this reduction of a benefit in which they've grown accustom and on which they may rely in achieving a healthy work-life balance? Or what if to save on labor costs, you eliminate the employee's incentive compensation and training opportunities and reduce their hours? Will the employee view the classification change as a demotion? Will they continue to view themselves as part of management? Will they start viewing this as just "another job," rather than as a "career" where he or she can achieve and advance, which may create employee engagement and retention problems?

In addition, employers should remember that their classification decision may impact more than just the reclassified employee. It may also impact other employees. What if the position on which you are deciding belongs within a family of jobs that share a salary band? If, for example, you decide to maintain the exemption by raising the position's salary, what if you do not make corresponding salary raises to those in the same family? Will this create resentment among the employees? Similarly, what if you raise the salary of an employee to maintain the exemption, but now he or she is earning close to what a more senior employee is earning? How will the more senior employee react? In order to avoid a pay compression issue, should you also consider raising the salaries of the more senior employees, which will once again drive up your labor costs?

And don't forget: this is an exercise that employers may have to undergo once every three years (or sometimes more frequently depending on what their state law requires). If you raise the salaries of the impacted employees and other employees in response to this new rule, will you be able to do it again in three years when the minimum salary threshold will likely be even higher, and perhaps significantly higher?

Some other things to think about: first, if you reclassify someone as non-exempt, will they then lose the flexibility to perform their job duties on their time and from remote locations? Some employers do not offer the same level of flexibility to their non-exempt workers because of the difficulty in or expense of tracking hours. Second, how will your workers react to this loss of flexibility? Will it impact morale? Third, what are your competitors are doing? If they are raising salaries and you move in the other direction, will your talent head for the exits? Fourth, can you restructure your compensation arrangement to control overtime costs? For example, can you utilize a flexible workweek method in order to calculate overtime at a half time premium rate rather than the traditional time and half overtime rate?

Finally, you should also consider the managerial and other administrative costs associated with making classification changes. Will you be able to effectively train your supervising employees on how to track the impacted employees' hours? How much additional time will managers spend doing this in lieu of performing other important tasks? How much will it cost you to modify your IT or other timekeeping systems to account for these newly-overtime-eligible individuals?

I've Made My Decision, Now What?

  • Consider whether this serves as a good opportunity to conduct a larger classification audit of your workforce.
  • Provide clear and effective communication for the reason for any reclassification to impacted workers and their managers. This one will require more than just a short formal memo alerting employees to the changes.
  • Change administrative procedures so that newly classified non-exempt employees are tracking their time properly. Further, in implementing the classification change, avoid off-the-clock claims by focusing on monitoring overtime hours worked. The impacted employees may, as a matter of habit and/or because they have the incentive to do so, attempt to continue to work long hours to make the same or more money. Combined with the fact that these employees were never previously required to track their time, you all of a sudden may become susceptible to costly off the clock wage and hour claims.
  • Providing additional training to managers on the changes.
  • Do not delay in addressing any morale or worker productivity issues resulting from reclassifying employees.
  • Updating personnel records, including written job descriptions, to reflect any reclassifications.
  • Don't fall victim to a "set it and forget it" mentality. You should gather and evaluate data related to your decision, including regarding overtime usage, turnover and related costs, to see whether the classification decision ultimately made business sense and whether you may need to move in a different direction on or before the three year window expires.

We will continue to update this post as developments unfold.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Michael S. Arnold
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