By Mike Kastner, NTEA Managing Director
This article was published in the September 2016 edition of NTEA News.
In May, the Obama Administration announced significant changes to overtime pay structure rules. Details were released through the Department of Labor (DOL). These new rules, which will require overtime pay for considerably more employees than today, take effect in December.
The rules were drafted based on a March 2014 Presidential Memorandum directing the DOL to modernize the nation’s overtime rules. The last comprehensive changes to the regulations were made in the 1970s.
In 1938, FLSA established the general standard that workers be paid time-and-a-half for any hours worked over 40 in a week. In general, all hourly employees are guaranteed overtime, and salaried workers are presumed to have the same guarantee unless they both: (1) make more than a salary threshold set by the DOL, and (2) pass a test demonstrating they primarily perform executive, administrative or professional duties. A limited number of occupations are not eligible for overtime pay (teachers, doctors and lawyers) or are subject to special provisions.
DOL’s rules effectively double the salary threshold for overtime — from $23,660 ($455 per week) to $47,476 per year ($913 per week) and will take effect Dec. 1, 2016. Hourly workers are generally guaranteed overtime pay regardless of earnings level. This new threshold will bring more salaried workers under the umbrella of overtime pay requirements. As a result, wage costs are expected to increase by $12 billion over the next 10 years.
As the new rules are structured, companies will have a choice: Pay those workers overtime for the extra hours they put in, or cap their hours at 40 per week.
One concern on the salary threshold is that it takes a “one-size fits all” approach. It is set at the 40th percentile of full-time salaried workers in the lowest income Census region (currently the South). Arguments were made in the rulemaking process that salaries below the new threshold could represent a comfortable income in certain parts of the country. The need to now pay overtime may hinder companies’ ability to grow.
Under the regulations, the threshold will be automatically updated every three years to keep pace with the economy. Based on current projections, it’s expected to increase to approximately $51,000 with the first update on Jan. 1, 2020.
Other issues
The new rules will raise the highly compensated employee threshold from $100,000 to $134,004. It is more likely that workers earning above this high salary level perform job duties that would exempt them from overtime requirements, so only minimal demonstration that they are not eligible for overtime has been required.
No changes are being made to the duties test but bonuses and incentive payments may now count toward up to 10 percent of the new salary threshold.
Congressional response
H.R. 5813, Overtime Reform and Enhancement Act, was introduced in response to the new DOL requirements. This legislation calls for a phase-in of the regulations rather than having them take effect all at once. Additionally, it would eliminate the automatic update provision.
Specifically, H.R. 5813 would phase-in the salary threshold increase, beginning Dec. 1, 2016, with a jump to approximately $35,984. Additional incremental increases would be implemented over the next three years, enabling employers to more effectively plan for new costs associated with the rule.
S. 2707 and H.R. 4773 have also been introduced in Congress in response to the DOL rules, which these bills would prohibit from taking effect.
Given the scheduled Dec. 1 effective date and lack of legislative session days between now and then, it may be prudent to prepare your company for these changes.
Considerations
Employers should start reviewing their pay structure and hours worked by those employees likely to fall under the new regulations. Using this data, businesses can start determining how these rules will likely affect their operations and begin considering options.
Based on a review of operations, a potential option includes increasing salaries above the new threshold to keep certain positions (primarily executive, administrative or professional) exempt from overtime. Companies could also choose to pay overtime for those hours worked over 40 in a week or prohibit or limit work over 40 hours by affected workers.
If you have any questions, email Mike Kastner at mkastner@ntea.com.