Highlights of the New Overtime Regulations, Traps to Avoid and How to Prepare

On May 18, 2016, the Department of Labor published the final rule updating the overtime regulations under the Fair Labor Standards Act. The Department of Labor estimates that more than 50,000 employees (and their employers) in Arkansas will be impacted by the changes. Here is our initial take on the changes made, the traps to avoid and how to prepare.

Key Provisions of the New Overtime Regulations

The main thing we’ve all been waiting for is the new salary level for the administrative, professional, executive and computer exemptions. The new regulations set the level at $913 a week, or $47,476 per year. That is a significant increase of $458 per week, and that is the new “reality” for employers that will take effect on December 1, 2016.

Other changes include:

1. The salary levels will be adjusted every three years (instead of every year as originally proposed) beginning in 2020.
2. The “highly compensated employee” exemption level jumps from $100,000 per year to $134,004 per year.
3. As we predicted in our “In the Workplace 2016” article published in Arkansas Business earlier this year, the Department of Labor’s new overtime rule does in fact allow the inclusion of bonuses when determining an employee’s total pay for purposes of the administrative, professional and executive exemptions. Non-discretionary bonuses, incentive payments and commissions paid on a quarterly or more frequent basis can account for up to 10% of the required salary level. Such payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability, and employers are allowed to make a “catch-up” payment in any given quarter to ensure an employee’s salary level in fact reaches the minimum level.

Don’t Fall Into a Trap When Making the Transition

One of the main questions we’ve received is this – can an employer get around the new overtime rules by treating employees as independent contractors? The answer is an emphatic “no,” unless you want to get in trouble with various government agencies, including the Department of Labor and the Internal Revenue Service.

Another potential “trap” we see – trying to limit your new, non-exempt employees to just forty hours of work per week. Chances are your previously exempt employees were working more than forty hours per week prior to the overtime rules change. Following the change, your newly non-exempt employees may be tempted to continue to work “off-the-clock,” as this is not a restriction with which they are accustomed.

A related pitfall when trying to limit employees to just forty hours per week – penalizing employees for working unauthorized overtime. While the common sense approach might be to withhold payment for unauthorized work time, chances are your business did in fact benefit from the work. To avoid any claim that you violated the Fair Labor Standards Act by refusing to pay for overtime work, you should discipline (such as verbal or written counseling) employees for any unauthorized work time, but pay them for the time worked.

Finally, be aware of how employees use home computers and smartphones. Previously exempt employees who could work and communicate with you 24/7 are now on-the-clock. Anything other than a de minimis amount of time spent working or communicating should now be compensated. These previously exempt employees may have the hardest time making the transition to recording their time. You will need to help them with that transition and stay on them about accurately recording their time.

How to Prepare

Will there be bumps in the road for a lot of employers making the transition? Undoubtedly. But, you can prepare by doing the following:

1. You have until December 1. Have your newly non-exempt employees start recording their time now. This helps in two ways – it gives you an idea of just how many hours a week they work, and it gets them in the habit of accurately recording their time.
2. Start talking to your employees now about the transition and why it’s happening. Although no one is being demoted and no job duties are being changed, some of your previously exempt employees will feel as if they have taken a step backwards. Help them ease into the new “reality” all businesses are facing.
3. Decide how you are going to handle after-hours communications/work – are you going to take away 24/7 access through computers and smart phones, or are you going to ensure that any work time is recorded and compensated?
4. Consider the use of the “fluctuating workweek” method of calculating overtime, which results in half-time overtime instead of time-and-a-half overtime. This method, however, is extremely complicated to administer.
5. Consider biting the bullet and increasing the pay of those now-exempt employees making less than the new standard. Remember, up to 10% of the salary under the new rule can be in the form of a non-discretionary bonus, incentive payment or commission.
6. Make sure you have a written policy warning employees about working off-the-clock and mandating that they accurately record their time.

Additionally, the Department of Labor has provided summaries and guidance documents for businesses, non-profits, state and local governments and higher education:

• Non-profit summary and guidance documents
• State and local government guidance document
• Higher education summary and guidance documents
• Private Employer guidance document

This transition will not be easy, but at least you have six months (instead of thirty-to-sixty days) to adjust to the Department of Labor’s new rules. Don’t wait until the last moment to start your transition.