In May of this year, the U.S. Department of Labor (DOL) announced its final rule increasing the minimum salary that must be paid to employees exempt from overtime pay. These new minimums take effect on December 1, 2016 – a little less than one month from now. The increase is significant, basically doubling from the present level of $23,660/year ($455/week) to $47,476/year ($913/week). In Pennsylvania alone, there are an estimated 185,000 employees who are below this new salary minimum and currently treated as exempt from overtime pay (134,000 estimated in Ohio, 17,000 in West Virginia, 278,000 in New York and 80,000 in Maryland). Complying with this change will involve a number of steps and careful consideration to avoid creating liability. Now is the time for employers to identify and implement a plan to meet these new requirements.
Increasing Salaries Not the Only Option for Compliance
Not every employee who will be paid below a salary of $47,476/year ($913/week) as of December 1, 2016 has to be given a pay raise. This would undoubtedly be an expensive proposition for employers, and in many cases could require an increase of 25% to 70% or more per employee. Instead, employers can convert the affected employees to receive overtime pay. For employers who choose this option, there are several choices on how to determine an employee’s overtime pay rate.
Most employers know of the hourly pay option – where an employee receives an hourly rate of pay for each hour worked up to 40 hours in a work week, and overtime at a rate of 1.5 times their hourly rate for time worked in excess of 40 hours in that week. There is also an option to pay employees a salary plus overtime. This option provides overtime pay at a lower rate than if the hourly pay option is used. Under the salary plus overtime method, employees get full regular pay even if they miss some hours during the regular work week (employees under the hourly pay method would not be paid for such missed time). In return for receiving their full salary without a reduction for missed hours, the overtime rate paid to employees under the salary plus overtime method is lower than with hourly pay method. If you are interested in learning more about the salary plus overtime option, please contact us, as application of this option is somewhat complicated due to some federal court decisions issued in the last few years.
If you convert someone to hourly pay, you have to decide what hourly pay rate to use. To do so, many employers simply convert an employee’s present salary to an hourly rate by dividing the weekly salary by the number of hours worked in a regular work week (typically 40 hours). Depending on how much overtime is likely to be worked in your organization, this could result in a significant increase in annual pay for employees. There are other alternatives to setting the hourly rate that have not received much attention or publicity. The DOL rule permits employers to use a lower hourly rate so that, considering the amount of overtime expected, the employee makes the same amount of money with overtime pay as he or she did with their prior salary. Again, call or e-mail us if you would like to understand or arrange how to do this.
Employers must also determine how to track and retain records of the hours worked by employees who will start receiving overtime pay as a result of the new rule. By law, time records for employees entitled to overtime pay must be kept for three years. There are various options for employers here. You don’t have to require these formerly overtime-exempt employees to punch a time clock or swipe a time badge. There are “pay by exception” reporting options that can and in many cases should be considered. You will also need to know what activities are to be regarded as paid time or counted towards overtime. The rules are fairly complicated, with different requirements for things like travel time, break and meal time, on-call time, training time, and clean-up time.
Communicating the Change to Employees
Another key decision for employers is how, when, and to whom they will communicate the changes that will be made to comply with the new DOL requirements. Pay changes must be communicated to employees in advance of the December 1, 2016 effective date. Employees being switched from salary to hourly pay may regard this change as a demotion (i.e., a removal from the professional or managerial ranks). How you communicate such change, as well as the pay choices you make, will influence how employees perceive and respond to it.
Potential for Increased Wage and Hour Claims
A significant consequence of the DOL’s new rule may be an increase in the number of employees – including those paid above the new minimum salary level – who question whether they are being paid correctly (e.g., whether they are entitled to overtime pay or more pay for the time they work). Wage and hour law provides that, in addition to being paid a salary at or above the designated minimum, only those employees whose job duties qualify them for one of the designated overtime exemption categories can lawfully be exempt from overtime pay. These overtime exemption categories – the most common of which are the professional, administrative, executive and outside sales categories – are based on job duties. These job duties are defined in DOL regulations in subjective and unclear terms. Court decisions provide better guidance, but the key point is that the increased attention this subject will get shortly before and after the new DOL rule takes effect on December 1, 2016 will likely prompt more employees to question whether they, too, should be getting overtime pay. As a result of the lack of legal clarity regarding the exemption categories, many employers have overclassified employees as exempt from overtime pay who actually do not meet the requirements. Just because an employee is paid a salary above the new minimum, that doesn’t necessarily mean he or she is exempt from overtime pay. It is worth noting that a job title is not enough to determine whether an employee is exempt from the overtime pay requirement. An employee’s actual duties must satisfy the legal requirements. As a proactive measure, employers should review their jobs now to be prepared for potential claims by employees in light of the new rule.
Resources to Help Comply With the New DOL Overtime Rules
Although the December 1, 2016 deadline is approaching, you can stay ahead of these issues by reviewing your pay practices and your employees’ specific jobs. Houston Harbaugh, P.C. has developed a proprietary employer self-audit questionnaire to guide employers through most of the common issues, such as which employees qualify to be exempt from overtime pay and what activities qualify as paid time and must therefore be counted towards overtime. We charge a nominal amount of $100 for these employer self-audit questionnaires and believe they are a cost-effective way of enabling employers to perform an independent initial review and assessment . The questionnaire may be purchased by submitting the Employer Self-Audit Questionnaire Order Form.*
We also urge anyone dealing with the DOL’s new rule regarding the minimum salary increase to work through these issues now and to get our help to understand employers’ options and obligations. Please contact our employment law attorneys to discuss this subject
For further information and detail on the new DOL rules, read Higher Salary Minimum Requirements Announced for Overtime Exempt Employees.
*Note: The Employer Self-Audit questionnaire forms are copyright of Houston Harbaugh, P.C. and are for the sole use of the purchaser. The forms are not to be shared with those outside your company/organization.