The U.S. Department of Labor has issued its Final Rule setting forth a new salary threshold for the white collar exemption to the minimum wage and overtime requirement of the Fair Labor Standards Act. Effective December 1, 2016, the standard salary threshold for the white collar exemption will increase from $455 per week ($23,660 per year) to $913 per week ($47,476 per year), making an estimated 4.2 million American workers eligible for overtime when they work more than 40 hours in any work week. The DOL predicts that this change will result in more than $1.2 billion in additional wages paid to employees each year.
Employers now have fewer than six months to prepare for this new rule. At first glance, employers must now decide whether to budget for additional overtime pay when newly eligible employees work more than 40 hours, raise the salaries of currently exempt employees to keep them exempt from the overtime requirement, or evaluate workload and staffing models and establish schedules designed to minimize overtime.
This is not a situation where employers can adopt a one-size-fits-all solution. The appropriate strategy for dealing with this new rule will depend on several factors, including current employee salaries, work schedules, business operations, and total cost.
In cases where employees make significantly less than the new salary threshold and only work more than 40 hours in a work week on occasion, it will generally make economic sense for an employer to accept that these employees will be eligible for overtime. Procedures should be established to ensure employers capture all hours worked by employees and to allow the employer control over when newly eligible employees work beyond 40 hours each week.
Employers that decide to operate with a group of newly eligible employees must make sure that these employees are recording and submitting all time worked on a regular basis, whether using a time clock, timesheets, or some other timekeeping method. Moreover, employers must implement policies to control when these newly eligible employees may work more than 40 hours in a week. If it is common for currently exempt employees to “take work home” to perform, employers will want to implement controls on this practice to avoid unnecessary overtime costs.
In cases where newly eligible employees are already paid wages close to the new salary threshold and these employees regularly work overtime, employers may choose to raise their salaries to the new salary threshold (or above it) on or before December 1, 2016 in order to maintain the overtime exemption. In addition to reviewing records of time worked and projecting the additional cost of a salary increase to the cost of paying overtime for these employees, employers should also examine whether these employees also meet the duties test for an executive, administrative, or professional employee. Employers must be confident that raising the salaries of newly eligible employees will effectively make them exempt from the overtime requirement before it implements any wage increases.
Employers not in a position to incur either the additional overtime expense or increased wages for soon-to-be eligible employees will need to implement strict controls limiting them to no more than 40 hours each week. The FLSA defines the term “employ” to include the words “suffer or permit to work,” which means that an employer must compensate employees for all hours that the employer requires or allows an employee to work. Under this definition, time spent “working off the clock” — doing work not requested by the employer, but still allowed — will be considered hours worked since the employer knows or has reason to believe that the employees are continuing to work and the employer is benefiting from the work being done.
Employers should also examine their current work schedule, hours of operation, and workload distribution in order to determine if work may be redistributed or if it may be less expensive to hire additional workers.
Goldberg Segalla will continue to monitor this situation and will report on new developments as they arise. Be on the lookout for new alerts from Goldberg Segalla as the effective date of the Final Rule approaches.
If you have any questions about how this could impact your business, please contact: