Editor’s Note: As of June 30, 2017, the U.S. Department of Labor (DOL) dropped its defense of the final overtime rule as written, but sought confirmation from the courts that it indeed maintains the authority to establish new salary thresholds. Three days earlier the DOL made clear its intent to rewrite the rules with lower salary thresholds. However, in the event the Fifth Circuit Court of Appeals reverses the District Court injunction, the Obama-era final rule could go into effect immediately, meaning employers who are not in compliance would be subject to penalties, possibly retroactively, according to Jackson Lewis attorney Jeffrey Brecher.
A U.S. Department of Labor (DOL) rule change that would extend overtime protections to an estimated 4.2 million workers was temporarily halted by an injunction after 21 states sued in District Court. The DOL subsequently appealed the decision and is awaiting a decision in the Fifth Circuit Court of Appeals. Below is an overview of the previous rule, which the DOL is expected to revisit and significantly revise after abdicating its defense of the Obama-era rule in court. The DOL has, however, maintained that it has the authority to set such a rule governing salary thresholds under the law.
The amendment to minimum wage and overtime regulations under the Fair Labor Standards Act was set to go into effect Dec. 1, and would have lifted long-standing exemptions and raised the pay threshold from $23,660 annually to $47,476. Positions once considered executive, administrative or professional would be subject to overtime pay as well, and the pay threshold would be indexed to wage growth and updated once every three years.
"This [rule change] definitely will take merchants by surprise if they're not careful and don't pay attention," Mark Schulze, co-founder of smart point-of-sale system Clover, told Business News Daily. "It's a big change, so many people are affected by it."
In short, employees who do not make at least the threshold salary and classify as exempt — now a narrower classification than before — are entitled to time-and-a-half pay after they've worked 40 hours in a week. The U.S. DOL maintains a list of valid exemptions for executive, administrative and professional positions for quick reference. [See Related Story: What You Need to Know About the New Federal Overtime Rules]
Much like with any other major change, business owners will need to ensure they're prepared to handle the transition. Here's everything you need to consider to make sure you're in compliance with federal regulations by the deadline.
What is required of employers?
First and foremost, it's important to track and record employees' hours properly. Failing to do so could lead to errors and potentially even costly lawsuits. For small businesses using pen and paper or Microsoft Excel to track hours manually, the change means more time spent in administrative tasks and a higher likelihood of mistakes. It might be worth your while to consider investing in a time-and-attendance system that could automate much of the task of tracking hours.
"If you are tracking time on paper, switch to an automated system," said John Waldmann, founder of employee scheduling company Homebase. "Tracking hours is complex, and the last thing you want is to be unprepared come Dec. 1 and have this catch up to you in 2017. This next month and a half is really the time to put the technological change in place."
Business owners will also encounter new difficulties when managing their labor budgets. It's necessary to revisit your operational practices as a whole, as well as the way you schedule and classify employees. Finding efficiencies wherever possible can help cut down on the total hours you spend on this task and reduce your likelihood of scheduling overtime for employees, Waldmann said.
"You can't adjust how much overtime is being accrued and how much people are working without rethinking how you run your business," Waldmann said.
What are the consequences for failing to plan accordingly?
Failure to comply with the new regulations can be disastrous for your bottom line, even to the point of ruining the business. At worst, an employee could file a wage-and-hour lawsuit against you, which will take considerable time and money just to settle.
"The exposure can be extremely large — magnified, of course, by how large your workforce happens to be," said M. Reid Estes, labor and employment practice department manager at law firm Dickinson Wright. "You see multimillion-dollar verdicts and settlements almost weekly."
Even if a lawsuit doesn't arise, you could end up spending a lot of extra hours correcting errors, and lost time is irreplaceable. Moreover, in an attempt to keep employees exempt, many employers might mistakenly raise salaries, only to find out a worker's job duties classify them as non-exempt; this essentially amounts to an added expense, Estes said.
"A lot of employers are taking the opportunity to do an audit," he said. "Look at your workforce, and make sure they meet the duties test [for exempt status]."
What are my options?
No two businesses are alike, and what suits one might not be right for another — so take the time to analyze your operations closely. In some cases, it might be appropriate to reshuffle employees' shifts and responsibilities, and in others, it might be enough to keep employees at the 40-hour-per-week cutoff. Here are the major ways companies should consider responding to the shift:
- Allow employees to work a maximum of 40 hours per week.
- Absorb the additional time-and-a-half costs for newly covered employees.
- Raise employees' salaries beyond the pay threshold.
- Change positions from salaried to hourly wages.
Business owners "will just have to take out the calculator and figure out what works for them," Schulze said.
Waldmann cautioned that any major changes in workplace policy or specific positions should be communicated clearly to employees, because after all, the changes affect them as well. For example, converting salaried positions to hourly ones without explaining the reasons for the change to employees could decrease employee morale.
"The big issue ... is that there's a demotion perception when you reclassify employees who are currently exempt," Estes said. "They like flexibility in their jobs, being able to leave and not having to count hours. They often view a reclassification to hourly as less prestigious and less flexible."
"Make your team aware of the policy changes, because this is going to affect them too, whether you're scheduling them for fewer hours or shifting their responsibilities," Waldmann added.
As the Dec. 1 deadline rapidly approaches, the window for thorough and accurate planning is closing. If you haven't already done so, consider meeting with an attorney or adviser to flesh out your specific situation. Simply obtaining a lawyer's written opinion could help reduce the impact of any future lawsuits that might arise.
"It's worth spending some money for the comfort, especially if you have a large workforce of exempt employees," Estes said, "and especially if you haven't looked [at their job duties] in a few years."
For a more in-depth look at your options, see Business News Daily's guide to surviving the new overtime regulations.