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BLOG: Rethinking Overtime: How the New FLSA Rules Might Affect Your Business

Posted on Friday, May 20, 2016 at 1:53 PM by Ryan Carson

Among the usual cacophony of news noise -- slipped in between Hillary’s deleted emails, mass panic over a potential Trump presidency, and the Zika virus—is the breaking news of sweeping changes to the “white collar exemption” in the overtime rules under the Fair Labor Standards Act (or “FLSA”).  Just recently, the Department of Labor (“DOL”) announced that come December 1, 2016, the salary level required for the executive, administrative, and professional white collar exemption will increase from $23,660 annually (or $455 per week) to $47,476 annually (or $913 per week).  The final rule was announced on May 17, 2016, and includes some other changes too, but the focus here will be the salary threshold. 

The implications of this change could be significant.  The Obama Administration has announced that this new rule will result in over 4.2 million employees now qualifying for overtime.  In Nebraska, the impact could be even greater because according to recent statistics, almost 45% of the workforce in Nebraska earns less than $47,476 per year.  This means that almost half of our State’s employees might now qualify for overtime.  The failure of employers to pay overtime can result in serious consequences, including reimbursement of back pay, double that amount in the form of “liquidated damages,” and attorneys’ fees.  Because of the penalties and the relative ease in proving a violation, there’s a reason why some call the FLSA the “For Lawyer’s Security Act.” 

These changes have been brewing for some time.  The FLSA has been around for a while – since 1938 to be exact—but changes to the white collar exemption have not been made since 2004.  In 2014, President Obama directed the DOL to update and modernize the regulations governing the exemption of executive, administrative, and professional employees from the minimum wage and overtime pay protections of the FLSA (or the “white collar exemption”).  Without the exemption, employees working more than 40 hours per week are entitled to overtime pay at “time and a half.”  The exemption permits certain classes of employees to be  . . . “exempt” for lack of a better word . . . from this requirement.  To be exempt, the employee must fall within three criteria: (1) the employee must be paid on a salary basis, and not hourly (or the “salary basis test”); (2) the employee must be paid a salary that is above the minimum threshold, which will soon be $47,476 (or the “salary level test”); and (3) the employee must perform certain executive, administrative, or professional duties on a consistent basis (or the “duties test”).  Under the duties test, an “executive” is an employee who manages the enterprise or manages a “customarily recognized department or subdivision” and supervises at least two full-time employees.  To be considered “administrative,” the employee must perform administrative tasks that require discretion and independent judgment and which involve “matters of significance” for the business.  To be considered a “professional,” the employee must perform work that requires advanced knowledge in a field of science or learning.  If the employee meets all three criteria, then the employer is not obligated to pay that employee overtime.  Of course, this is a truncated version and you are welcome to review the Code of Federal Regulations in its entirety if you’re really that bored. 

In light of the upcoming changes with the salary threshold, employers are faced with the unenviable position of having to reclassify their workforce, ensuring their recordkeeping is up to par, and budgeting for the potential increase in overtime pay.  According to the DOL, employers have several options.  For those employees whose salary falls below $47,476, but who do not work overtime, no changes will be necessary.  For those employees who earn just below the new threshold and who satisfy the duties test and work overtime, the employer may wish to increase their salary to meet the threshold and avoid having to pay overtime.  But, what about those employees who earn substantially less than the threshold, but who regularly work overtime?  This is when a basic cost-benefit analysis may come in handy.  Take a low-level manager earning approximately $32,000 per year.  That equates to $615 per week, which if you divide by 40 hours, equals $15.38 an hour.  Overtime pay would be time and a half, or $15.38 + $7.69, which equals $23.07 per hour.  Now, let’s say this managerial employee regularly works 60 hours per week.  If the employee works 20 hours of overtime each week, for 50 weeks (presuming you’re not Scrooge and Mr. Cratchit isn’t forced to work at midnight on Christmas Eve or every single day of the year), that would equate to an additional $23,075 per year in overtime pay.  The alternative to this big bump might be to raise the employee’s salary by $15,476 in order to get the employee to the new salary threshold instead.  Of course, there are a number of other alternatives too, including reducing overtime work, reassigning tasks and responsibilities, hiring new employees, or others.  Although the Obama Administration has claimed that reductions in the workforce are unlikely, many aren’t so sure.  According to the U.S. Chamber of Commerce, “many employers – especially small and midsize businesses, [won’t] be able to absorb the increased labor and litigation costs.  These added costs [will] mean fewer opportunities for growth and could even result in a curb on hiring.”

It is clear that the new changes have caused quite a stir.  4.2 million Employees think they’re going to get a raise on December 1st, and their employers are worried they’ll have to give them one.  But like most things in the law, the rules are subject to the facts and circumstances of each case and there is no easy or clear answer.  Employers should make sure they keep good time records, reassess their employee classifications, check their budget, check employee handbooks, consult with counsel, and wait to see what happens in November.  After all, this may all be for naught come Inauguration Day . . . or not.  



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