Employers May Be Required to Pay More Employees Overtime

The Department of Labor's ("DOL") new overtime rule, which takes effect on Dec. 1, 2016, makes millions more employees eligible for overtime pay. Under the Fair Labor Standards Act of 1938 (FLSA), salaried employees are guaranteed overtime for any hours they work beyond the standard 40-hour workweek, with exceptions to the rule based on both the employee's duties and salary level. The purpose of the FLSA is to protect employees from exploitation, but businesses need flexibility, so FLSA exempts bona fide salaried executive, administrative and professional employees, and many technology employees from overtime pay requirements. Most employees, however, are covered by the FLSA and must be paid at least federal and state minimum wage and receive overtime pay of 1.5 times their regular hourly rate when they work more than 40 hours in a week.

The most notable aspect of the DOL's new rule requires employers with employees earning up to $47,476 a year or $913 per week, to pay time-and-a-half overtime pay when employees work more than 40 hours during a week. The previous cutoff for overtime pay, set in 2004, was $23,660. The new salary threshold is equal to the 40th percentile of weekly earnings for full-time, salaried employees in the nation's lowest income region, currently the South. In order to ensure that the salary threshold stays at the 40th percentile benchmark, the rule requires an automatic update of the salary guidelines every three years.

The Labor Department estimates that an additional 4.2 million white-collar employees who earn above the old threshold but below the new one will now be entitled to time-and-a-half wages for each hour they work beyond a 40 hour work week. DOL contends that the new rule will set employers back $1.5 billion annually, with $1.2 billion in increased overtime pay and $300 million in corresponding administrative costs.

Despite the DOL's assurances, small businesses across the country are concerned about the cumulative effects that the new rule may have on their bottom lines. Notably, small businesses worry that under the new regulations they will have very few options when it comes to balancing wage payouts with productivity. For example, businesses might choose to keep salaries the same and cut or reduce overtime; raise salaries above the new threshold, so they will be no need to worry about overtime; lower base salaries of those who regularly work more than 40 hours, in expectation that overtime pay will make up the difference; or hire more employees to cover the extra hours from salaried employees. Some contend that instead of increasing salaries to raise employees above the overtime threshold, many businesses will simply reclassify professionals as hourly employees, removing their existing perks, flexibility, and certain benefits. Comp time, where employees work overtime in exchange for future days off, is not allowed for those eligible for overtime under the new regulation.

In any event, employers have another five months before the regulation goes into effect and should use this time to prepare. First and foremost before any decisions are made employers should figure out how many employees are close to new salary threshold and how many hours these employees are actually working. Additionally, employers should do their due diligence and ensure that any plan, reclassification, or salary changes is in full compliance with the requirements of the FLSA.