New Overtime Rules Could Result in Loss of Exempt Status for Salaried Employees

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Note: the DOL’s rules have been tempoarily blocked by an injunction issued by a federal judge in Texas. For more information about that case, please see New Overtime Rule BLOCKED by Texas Court.

The U.S. Department of Labor’s proposed changes to the nation’s overtime pay rules would have a profound impact on workplaces throughout the country. The impact would be the potential loss of exempt status for many salaried employees. To prepare, employers should familiarize themselves with the proposed new rule and review their pay practices to ensure compliance in case the new overtime rules take effect.

The new rules would increase the minimum salary an employee must be paid before s/he may be classified as exempt from overtime pay under the Fair Labor Standards Act. This means many employees who are now properly classified as exempt will no longer be exempt. Consequently, they would then be eligible for overtime pay if they work more than forty hours in a workweek.

The change would come about because the FLSA generally requires most U.S. employers to pay overtime (that is, one and one-half times the employee’s regular rate of pay) when employees work more than forty hours in a work week. However, certain categories of employees are exempt from that requirement.

To qualify for some exemptions, those employees must not only perform certain duties as specified in the FLSA, but they must also be paid a minimum salary. Currently, that minimum salary is $455 per week ($23,660 per year). Under the new rule, that threshold would more than double to $970 per week ($50,440 per year).

The impact can be illustrated with a hypothetical workplace where an employee is currently paid a salary somewhere between $24,000 and $50,000 per year and works an average of 45 to 50 hours per week. Assuming that employee meets one of the FLSA’s “duties” tests, the employee would likely be considered exempt and not entitled to overtime pay. Therefore, the employee would be paid the same regardless of how many hours s/he works in a week.

If the new rules take effect, the same employee would no longer be exempt, and s/he would be entitled to overtime pay for the extra five to ten hours of work each week. Therefore, the employer would need to increase the employee’s salary to meet the new threshold and maintain the exemption, or the employer would need to convert the employee to an hourly-rate employee and pay time and a half for any overtime.

The new rules have not yet gone into effect, and it is not entirely clear if and when they will. They were initially slated to take effect this spring. However, the Society for Human Resource Management reports that this may not happen until later this year. SHRM also reports there is a remote chance that Congress could overturn the rules using the Congressional Review Act and/or that the rules will be challenged in court.

In the meantime, employers should pay attention to the potential rule change and be prepared to change their pay practices to remain in compliance. Suggestions include:

  • Determine which currently exempt employees would no longer be exempt if the salary threshold increases;
  • Assuming an employee’s exemption would be lost under the new rules, decide whether to increase the employee’s salary to meet the new threshold or convert the employee’s salary to an hourly rate basis;
  • Budget for any increased overtime costs resulting from employees who would become eligible for it under the new rules;
  • Review scheduling issues to determine whether hours can be reduced to limit the overtime liability for an employee who must be treated as non-exempt;
  • Address morale issues that could result from any perceived “demotion” of employees from exempt/salaried to non-exempt/hourly status.

In addition, although the proposed new rules do not alter the “duties” test for FLSA exemptions, employers would be wise to take this opportunity to review their exempt employees’ duties to determine whether they actually meet those duties tests. This is because even if an employee meets the salary test (whether under the current or proposed new standards), that does not automatically mean the employee is exempt from the law’s overtime pay requirements.

For more information about FLSA exemption issues, please contact me at [email protected].

The comments posted in this blog are for general informational purposes only. They are not to be considered as legal advice, and they do not establish an attorney-client relationship. For legal advice regarding your specific situation, please consult your attorney.

Copyright 2016 Swenson Lervick Syverson Trosvig Jacobson Schultz Cass, PA.

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