The U.S. Department of Labor estimates that its new overtime rules, which go into effect Jan. 1, will make an additional 1.3 million American workers eligible for overtime wages under the Fair Labor Standards Act.
Under current law, employers must pay overtime to employees who both work more than 40 hours per week and earn a salary below $455 per week ($23,660 annualized). The new overtime rules raise the salary threshold for the executive, administrative, and professional exemptions — often called “white-collar” exemptions — to $684 per week ($35,568 annualized). This same threshold will apply to employees with a computer employee exemption status. The DOL’s new minimum weekly standard salary level is considerably lower than the $913 per week level ($47,476 annualized) proposed in its 2016 overtime rules, which never went into effect after being blocked by a Texas federal district court.
In addition to increasing the minimum standard salary level to $684 per week, the new rules will:
► Raise the total annual compensation requirement for the highly compensated employee (HCE) exemption from $100,000 to $107,432.
► Allow employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid annually or on a more frequent basis to account for up to 10% of an employee’s required weekly salary level. Also, employers will be allowed to make a final “catch-up” payment (up to 10% of the standard salary level, or $3,556.80) within one pay period after the end of each 52-week period to ensure an employee’s salary level reaches the new minimum level of $35,568.
The new overtime rules do not include automatic adjustments to the salary thresholds (as proposed in the DOL’s ill-fated 2016 overtime rules). Instead, the DOL has committed to periodically updating the minimum salary thresholds through its traditional rulemaking process.
Complying with the New Rules
If you’ve prepared for the new rules by reviewing your exempt positions, you have probably determined that it is a logical option to convert those employees with lower salaries who typically work less than 40 hours per week to non-exempt and pay overtime for the occasional overtime hours they may work. On the other hand, for those employees with higher salaries who work long hours, you may have determined that it is worth raising their salaries above $35,568 because that likely will cost less than what you would end up paying in overtime hours. And you may have decided that some currently exempt positions should be non-exempt regardless of whether the positions make $684 per week or more.
Now that you have taken the steps to prepare for the new rules, here are some tips for complying with the new rules after they take effect:
1. Carefully monitor your newly non-exempt employees’ time.
If your newly non-exempt employees were routinely working more than 40 hours per week before you reclassify them, they may be tempted to work “off-the-clock” for a variety of reasons while adjusting to their new weekly work hour limitations. But remember that it is a violation of the wage and hour laws to penalize employees for working “unauthorized” overtime by withholding payment for their overtime work. You can discipline employees for any unauthorized work time (e.g., verbal or written counseling) but always pay them for the time worked.
2. Make sure you have a written policy that warns your employees about working off-the-clock and mandates that they accurately record their time.
Also, if you have not already done so, decide how you are going to handle after-business hours communications and implement a written policy. Be aware of how your employees use home computers and smartphones. As soon as you reclassify them as non-exempt, your previously exempt employees will no longer be able to work and communicate with you 24/7 without being paid. They now will be on-the-clock, and you should compensate them for time spent on work-related matters, including electronic communications. Your oversight will be critical to ensure that these previously exempt employees are accurately recording their time.
3. Classify employees properly, taking into account both their salary and their duties.
Employers should keep in mind that the FLSA’s “duties test” remains intact under the new overtime rules. In other words, placing an employee on salary (or assigning a particular job title to an employee) does not automatically exempt the employee from overtime — both an employee’s salary and an employee’s duties determine eligibility for an exemption. This means that if your employee meets the minimum salary threshold but not the duties test for a white-collar, computer employee, or HCE exemption status, then that employee is still eligible for overtime. Employers who choose to pay non-exempt employees on a salary basis must still track all the non-exempt employee’s time and then pay overtime for hours that exceed 40 in a workweek.
Properly classifying employees will help you avoid or defend against a misclassification lawsuit, which can be particularly challenging. Unlike most employment cases, the employer’s intentions are irrelevant in a wage and hour case — a violation is a violation regardless of whether it was intentional. The employer also bears the burden of proving compliance with wage and hour laws, including keeping accurate records of all time worked. In the absence of accurate time records, courts will typically accept at face value an employee’s account of his or her unpaid overtime hours worked.
Misclassification lawsuits (like most wage and hour lawsuits) are also expensive. A prevailing plaintiff is entitled to back wages for up to three years and liquidated (double) damages, as well as attorney’s fees and costs. Because the unpaid work time in a misclassification lawsuit often pushes an employee’s compensable time to more than 40 hours in a workweek and into a higher overtime pay rate, the total back wages owed can quickly add up to a significant amount.
In addition, while current or former employees can file individual lawsuits, many FLSA lawsuits are filed and litigated as collective actions (i.e., where the plaintiff brings claims individually and on behalf of other similarly situated employees who eventually may opt in to join the lawsuit). Defense costs in FLSA collective actions are higher because they simply involve multiple plaintiffs.