In June, the Department of Labor (DOL) proposed revised regulations which affect the Fair Labor Standards Act’s “white collar” overtime exemptions. The proposed regulations increase the salary threshold needed to qualify for overtime exemption from $455/week ($23,600 per year) to $970/week ($50,440 per year). Any business that employs workers with salaries less than $50,440 will be directly affected. According to Paycor data, this means that roughly 2 out of 3 businesses nationwide will be affected by the update.
Since 1940, the Department’s regulations have generally required that three tests to be met for one of the Fair Labor Standards Act’s white collar exemptions to apply:
- The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality of work performed.
- The amount of salary paid must meet a minimum specified amount.
- The employee’s job duties must primarily involve executive, administrative, or professional duties, as defined by the DOL’s regulations.
Employers will need to track the employee hours for those whose salaries are below the $50,440 threshold. These employers will have to pay their salaried employees for any overtime hours worked. For example, say an employee’s salary is $40,000 a year and the employee works 41 hours each week (1 hour of overtime a week) for 52 weeks. Based on full-time employment of 2,080 hours per year, then the employer will have paid the employee $1,500 in additional gross income by the end of the year to compensate for the overtime under the new regulation [($40,000/2080 hours) X 1.5 overtime X 52 weeks].
Not keeping track of the hours worked for employees below the salary threshold could end up costing employers in the long run. Employers with current exempt workers have not been keeping track of the weekly hours of their workers who were above the original threshold ($23,600 per year). The employers need to know which employees are logging more than 40 hours a week, and if they will qualify for overtime with the new regulations. This will help the employer to pay the employees their overtime or to stop the employee from having overtime with regards to the new regulations. Employers who fail to pay the overtime when it is due can face many penalties. Employers need to have accurate data of qualifying employees so they know how much overtime they are paying an employee in case they get audited by the Department of Labor for not following the regulations.
There are essentially four options an employer can choose to handle the new regulation:
- The first option would be to do nothing. If an employer chooses this option then their labor costs will rise if employees work overtime.
- The second option is to ensure that all salaried employees are paid at least $50,440 annually. It’s likely that this option will also increase labor costs.
- The third option would be to mandate no overtime at your workplace. This will be very hard to enforce and will require businesses to take a close look at their handbooks and policies. It could also result in lower productivity.
- The fourth would be to adjust affected salaried employees to an hourly wage using timekeeping data to determine an appropriate hourly rate, based on the amount of hours the employee typically works. For example, say an employee makes $40,000 a year and usually works around 50 hours a week, then under the new regulation the employee would receive overtime. However, the employer could decrease the employee’s hourly rate so that when the employee does work overtime the employer will still be paying the employee around the $40,000 the employee was originally making.
No matter what option a business chooses to pursue, there will have to be time, energy, and effort put into staying in compliance with the new regulation.
As legislation changes and evolves, it’s essential to maintain a proactive and responsive approach to your business strategy. Now more than ever, it’s important to review the proposed Department of Labor rule changes to ensure that you are ahead of the curve. For additional information on these changes, or any other matters that may affect your business, contact us at 513-241-8313, or click here to have a representative reach out to you. We look forward to speaking with you soon!