The HR Pro: Big Overtime Rule Change Could Mean a Big Change to Your Bottom Line

Beth Rattigan -
Beth Rattigan

Employers across New Hampshire, Vermont and the country are about to see big changes in overtime pay.

Earlier this year, President Obama signed an executive order directing the Department of Labor to update the overtime rules under the Fair Labor Standards Act. The most significant proposed change for employers is that salaried employees making less than $50,440 annually will become eligible for overtime pay beginning in 2016.

The Fair Labor Standards Act is the federal law that requires employers to pay minimum wages and overtime to employees who work more than 40 hours in a workweek. The act, however, exempts certain employees from the minimum wage and overtime pay requirements. To qualify for the overtime exemption, employees must:

■ Be paid on a salary basis (that is, no change in salary regardless of hours worked).

■ Be paid a minimum salary level.

■ Meet all criteria of the applicable job duties tests.

Although there are a variety of exemptions, the three primary exemptions are the Executive, Administrative and Professional, which commonly are referred to as the “white-collar” exemptions. Each exemption has its own job duties test and the burden is on the employer to show that an employee meets the job duties test of the applicable exemption.

Regardless of job title, if an employee does not meet all of the exemption requirements, the employee is nonexempt and must be paid overtime at 1.5 times his or her hourly rate for all hours worked after 40 in a week. There is a common misperception that paying an employee a salary means they are “exempt” from overtime. This is not true. Payment of a salary is only one of the requirements for exemption. All other requirements must be met for an employee to be exempt from the overtime pay requirement.

Under the proposed new rule, the minimum salary level for an exempt employee will jump to $970 a week ($50,440 annually) from the current $455 a week ($23,660 annually). What this means is that employees who currently are exempt and who make less than the salary level of $50,440 when the new rules become effective will have to track their hours and be paid overtime for all hours worked in excess of 40 in a workweek.

This new salary threshold, which is more than double the current level, is expected to affect millions of workers across the country.

For employers, one of the most important implications of the change will be the need to track overtime performed by employees who are reclassified as nonexempt. Typically, exempt employees do not submit time sheets or otherwise keep records of their hours. Therefore, many employers will not know the actual number of hours their exempt employees have been working.

When these exempt employees are reclassified as nonexempt because they no longer meet the salary level test, their hours will need to be recorded and any hours over 40 in a workweek will be considered overtime.

In addition, a growing challenge in modern-day workplaces is that technology has increased the likelihood that employees perform work out of the office, such as checking and responding to emails, making calls, and working from home before or after regular hours. This “off-the-clock” time must be accounted for and paid when employees are reclassified as nonexempt .

These proposed changes may have a significant effect on an employer’s payroll budget. Either employees will receive a pay raise to meet the new salary level, or they will have to be reclassified as nonexempt and be paid overtime. Of course, no employer is required to provide overtime work to employees, and many employers may opt to control the expense of the proposed rule change by reducing hours or closely monitoring the number of hours nonexempt employees work. Other options employers may consider include reducing bonuses to increase base salaries above the new threshold or hiring new hourly personnel to reduce overtime hours from more highly paid workers.

The public comment period on the proposed changes, which expired Sept. 4, generated an unprecedented number of comments, many from employers and organizations concerned with the significant cost burdens the rule imposes. The Department of Labor could amend the proposed changes, but there are indications that it intends to proceed with a final rule in early 2016.

As employers prepare their 2016 budgets, now is the time to review positions that may be affected, calculate budgetary effects and consider options.

Author: Beth Rattigan

Enterprise is a quarterly business magazine published by the Valley News. For more information email or call 603-727-3315.

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