This is our fifth, and hopefully final, article regarding the Department of Labor (DOL) revised overtime regulations. On May 18, 2016 the final rule was released to the public after months of delay because of the 200,000+ comments by the public. It is estimated, that within a year from implementation, 4.2 million Americans will be reclassified as Non-Exempt and will be eligible to receive overtime pay for all hours worked over 40 in the work week. Following California and New York, in Florida that will be 330,870, which would be the third highest in the country.
So what was the administration's goal for the new rule? The goal was to make overtime pay available to more Americans, which they project would put more money in their pockets, thus moving them toward middle class. That's the administration's goal, but later in this article we will highlight how some employers may react to this change in the law.
As you recall from the previous articles, the proposed rule raised the minimum salary level to be eligible to be classified Exempt from $23,660 per year to $50,440 per year, a 113 percent increase. Anyone making less than the minimum could no longer be classified as Exempt and would be eligible for overtime pay at time and a half their hourly rate. The final rule raised the minimum to $47,476 per year. That is less than the proposed rule, but is still a huge increase of more than 100 percent! Many had hoped the new minimum would be in the $35-$40,000 range.
As an aside, another change in the final rule is the minimum total salary for highly compensated executives (HCE), which changed from $100,000 per year to $134,004 per year.
The proposed rule called for annual increases to the minimum salary requirements which concerned many people because it would mean managers would have to annually re-evaluate who no longer would be eligible to be in the Exempt classification. The final rule calls for increases every three years. Still, because of the formula DOL will be using to calculate the minimum, the increase in the minimum every three years will be significant.
The proposed rule did not reflect any changes to the "duties test" that must be passed after meeting the minimum salary requirements. Rather, DOL asked several questions and sought input from the public about what changes should be made. They hinted at adopting California's duties test which would have made employers prove how much of an employee's time was actually spent performing Exempt type duties. To do that would require individual time studies, a time consuming laborious project and frankly, easy to manipulate. Fortunately, the final rule did not make any changes to the duties test!
As mentioned earlier, the administration's goal is to put more money in the hands of employees to the tune of estimated billions of dollars a year nationwide. Or will the opposite be the result of these significant changes? The administration thinks businesses will allow the former Exempt employees who have been routinely working more than 40 hours a week to continue working those same hours.
Let us look at the employer's options:
Option 1
is to not allow anyone who is Non-Exempt to work overtime. Most employers already limit overtime and others do not allow it at all. That will mean employers will hire part time people to pick up where the full time people ended their 40 hours. It is cheaper than paying overtime. Remember, employers have to turn a profit to stay in business. Even non-profits have to live within a set budget.
Option 2
is to reduce the hourly rate of the salaried employees so that if they are working overtime then they will not make more than they did when they were Exempt from overtime. Each individual's hourly rate adjustment would be based on the historical actual hours of overtime worked.
Option 3
is for those employees whose current salary is close to the new minimum to consider which ones will get a pay increase in order for them to remain Exempt. The employers who opt for this will have to keep in mind that in three years there will be a new minimum.
The final rule does not go into effect until December 1, 2016.
Do you think the administration is right, and billions of dollars will be in the hands of employees, or do you think that businesses have to remain financially viable and chose one or more of the above options? Time will tell what the consequences of this rule will be.
