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Preparing for the new FLSA overtime rule - Part 1

Perhaps you've heard about the new Overtime Rule ("new rule") that was recently promulgated by the US Department of Labor. Or perhaps you are just hearing about it for the first time. You aren't sure if the new rule will affect your business, when it goes into effect, or what you need to do to prepare your business. Below are some tips for understanding and navigating the new rule.

The new FLSA rule that goes into effect December 1, 2016 will likely have a monumental effect on employers. Hourly workers, lower-wage earners, and non-managerial workers have traditionally been paid 1.5 times their hourly wage when they work more than 40 hours per week. Under the new rule, overtime will be paid to many more workers, including those on salary. The new rule increases the minimum salary threshold at which a full-time worker can be exempt from the FLSA overtime rule from $23,660 to $47,476 annually, or from $455 to $913 weekly. The salary threshold level will be adjusted every three years, and employers can now include non-discretionary bonuses and commissions to comprise up to 10% of the salary level so long as those payments are made on at least a quarterly basis. However, the value of other fringe benefits such as health insurance still cannot be counted toward the salary threshold.

Who is affected?

The new rule will primarily affect those who perform exempt duties, such as executive, administrative, and professional employees, and currently earn between the old minimum and the new minimum. The new rule did not change the duties requirements for the exemptions from the FLSA's overtime-pay provisions. "Executives" must be in charge of part of a business and supervise at least two full-time workers. "Administrative" workers perform duties related to the management or general business operations using discretion and independent judgment. "Professionals" are divided into either learned (highly educated) or creative (artistic) sub-groups. The new rule does not change the historical definition of the "duties" portion of the overtime requirement exemption test; rather, it only changes the "salary" portion of the test. If an employee satisfies the new salary requirements, but does not satisfy the duties test (such as the employee supervises only one worker when the test states that they must supervise at least two), he or she may not be classified as exempt.

There is also a second set of "highly compensated employee" exemptions for white-collar workers who earn at least $100,000 annually. These are employees who perform duties that may not strictly meet all of the requirements for either the executive, administrative, or professional exemption, but are so close that the employer worries it may lose a dispute, if one came to pass. The new regulations increase that annual requirement for such workers to more than $134,000.

The new rule will also impact workers who earn slightly more than the new minimum. This is because there will be a ripple effect for compensation changes - if one worker's compensation is increased because of the new regulations, the employer may also want to adjust the compensation of people earning slightly more. Additionally, the new rule provides for automatic increases in the earnings threshold every three years based on statistics on compensation for salaried workers. So, the minimum salary will be based on the 40th percentile in lowest-wage region in the US (typically the Southeastern region), and the annual earning threshold for highly compensated employees will be based on the 90th percentile nationally. Based on current projections, the salary threshold is expected to rise to more than $51,000 with its first update on January 1, 2020.

The new rule will affect small businesses as well as larger ones. If a business has sales of at least $500,000 per year, it is subject to the FLSA and the new overtime rule. Even if an employer is not covered by the FLSA, most of its employees probably are - the FLSA applies individual coverage to employees who regularly engage in interstate commerce or in the production of goods for interstate commerce.

The new rule does not change the exemption for commissioned sales employees in retail and service establishments who must continue to be paid one-and-a-half times the minimum wage for all hours worked and receive a majority of their earnings in commissions when working over 40 hours in a week.

How should employers react?

Before the December 1, 2016 deadline, employers with salaried workers should audit the exempt status and salaries of their employees to ensure compliance with the new rule. The audit should include a review of salaries to ensure that, if the employer desires to maintain any employees as "exempt", all exempt workers are paid at least the minimum salary required for exemption under the new rule. Employers might use the audit as an opportunity to analyze the job duties of positions about which there are classification concerns in order to ensure that the job duties of those positions satisfy the requirements of the existing duties test. When performing the audit, employers should keep in mind that the FLSA counts as time worked activities that might be performed outside normal business hours and off premises. For example, responding to email, phone calls, or messages counts as time worked under the FLSA, and in some situations being on call or traveling also counts as time worked.

Employers will need to find a time and attendance tracking solution to accurately calculate the hours worked per week in order to determine what action is necessary to comply with the new regulations. Real-time reports on hours worked and employees' rate of pay will be a significant advantage in this analysis and in any audit. For purposes of the FLSA, accurate reporting is the duty of the employer and not of the employee.

Is there any possibility that I won't have to comply by December 1?

There are a few factors in play that might delay or completely block the FLSA new overtime rule from taking effect. On September 28, 2016 the House of Representatives passed a bill (H.R. 6094) that would delay the effective date of the new overtime rule by 6 months, from December 1, 2016 to June 1, 2017. However, before it would become a law the bill must pass the Senate, and avoid a Presidential veto. It is very possible that the bill might not even reach the Senate floor for a vote, or it might not pass in the Senate given the current make-up. If it does, President Obama has strongly opposed any delay in the rule's effective date, and has threatened to veto any such law. It is unlikely that Congress would have enough votes to override any such veto.

In addition to this bill, there are two Court cases that have been filed challenging the new rule. Ohio and 20 other states including Indiana, Michigan, and Kentucky filed a lawsuit against the DOL and others seeking to halt the new rule. Separately, a coalition of more than 50 business groups including the U.S. Chamber of Commerce filed a similar lawsuit. Both of the suits were filed in a Federal District Court in Sherman, Texas on September 20, 2016. The outcome of these suits is not clear but, with just over a month before the rule is set to go into effect, it is wise for employers to prepare as if the rule will be going into effect as scheduled on December 1, 2016 and to plan and prepare accordingly.

Part 2, coming soon, will discuss some strategies to assist your business in navigating the new Overtime Rule and how BHMK may be able to assist your business should the rule go into effect on December 1.

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