New Federal Overtime Rules

How to Comply with the New Federal Overtime Rules?

On December 1, 2016, new federal rules governing overtime pay go into effect. It’s a big deal: The Department of Labor estimates that the amendment to the Fair Labor Standards Act will affect how 4.2 million workers are paid. So, with the December 1st effective date around the corner, the time is now to make sure you comply and properly communicate the changes to affected employees.

The primary impact will be on exempt employees; executive, administrative and professional employees. Although the term “white collar” is often used to describe these employees, the new overtime rules will mostly affect lower paid and/or mid-level managers; many of whom will no longer be exempt and will become entitled to overtime pay.

What’s changing? The new rules increase the salary threshold for exempt employees. After December 1st, to remain exempt from overtime pay requirements, an executive, administrative or professional employee (there are limited exceptions) must be paid a minimum of $913/week or $47,476/year (up from $23,660/year). In the vast majority of instances, if exempt employees are paid any less, they must receive overtime pay for all hours worked over 40 hours in a week. There is, however, one way to pay them a lower annual salary; involving a base salary plus a non-discretionary bonus.

What to do? The salaries of currently exempt employees must be reviewed. If those employees are properly classified as an executive, administrative or professional but are paid an annual salary of less than $47,476, the employer must then compare the cost of increasing the employee’s compensation (including any bonuses and commissions) to the cost of making overtime payments. After that analysis, the employer, with respect to each affected employee, must decide among several options, including: (1) preserve the employee’s exempt status by increasing their salary to the new minimum level or (2) maintain their current compensation level, on a salary or an hourly basis, and pay overtime for hours worked beyond 40 hours a week.

What to Say to Employees? Once you decide how to respond to the new rules, you must comply with state or local requirements to provide advance notice of a pay change. You should also communicate to each affected employee–explaining the change, the specific impact on their compensation, and that the change is necessary to comply with a new law. You should be especially sensitive in your conversations with employees when converting an exempt employee to hourly status, as the change could be perceived as a demotion. Other challenges to the new regulations are the need to make newly non-exempt employees aware of your timekeeping practices and your policy on obtaining permission before working overtime (to avoid unauthorized time).

We can help your business understand and comply with all aspects of the new federal overtime rules, including other features of the amendment that are not otherwise addressed in this alert such as the automatic salary increases and the impact on “highly compensated employees.” Our firm has years of experience in counseling employers about the Fair Labor Standards Act and other wage and hour laws. The new overtimes rules can be easily addressed with the proper guidance.