By now it is clear that the federal Department of Labor fully expects to approve and implement wage-and-hour changes that will significantly increase the number of workers eligible for overtime pay. The DOL, in keeping with the Obama administration’s desire to see wages rise generally, has announced proposed rule changes that would more than double the salary threshold – from $23,660 to $50,440 annually – required for an employee to qualify as exempt from receiving overtime pay. The DOL may adjust the new salary threshold to some extent, but it is virtually certain to adopt new rules that change the employment landscape significantly.
Few companies can absorb the overnight payroll increases that such a change will create, much less quickly effectuate all the administrative changes that will result. Therefore, it is vital that companies start analyzing the situation now to avoid these pitfalls and make sound business decisions on how to respond when final regulations are issued sometime next year.
How to Address the Problem
Employers should immediately start gathering and analyzing information regarding what individual employees and groups of employees in exempt positions actually do, and how many hours each employee actually works weekly, particularly with respect to those jobs at the lower end of the salary spectrum. While the regulations are not yet final, it is important to start this process right away, for two reasons. First, performing this analysis may alert management to employees who are improperly classified as exempt because they do not perform exempt duties consistently enough to warrant the exemption. This is a common mistake, and the imminent regulation changes give employers an opportunity to proactively reassess and make adjustments.
Second, for employees who are properly classified as exempt, many have not tracked work hours for years, and may be reluctant to do so. Management must have sufficient time to consider options for employees paid below the proposed new threshold before the regulations take effect. Knowing the number of hours worked weekly over a representative period of time gives management a true sense of how it can best respond when the regulations are finalized.
With this information in hand, management will then be in a position to consider which of three general approaches makes the most sense in terms of controlling payroll and administrative burdens related to employees whose salaries are below the new minimum. These general approaches are:
- Increase the employee’s salary to the new minimum. As long as the employee is properly classified as exempt, this approach will minimize disruption and simply maintain the status quo. It should be considered for employees who are paid close to the new minimum, particularly those in high-income locations (e.g., New York and San Francisco) or in high-income positions (e.g., architects and engineers).
- Do nothing to an employee’s current salary and forfeit the overtime exemption, but control the amount of overtime the employee works. This approach requires caution but works best when the employee’s weekly hours are relatively stable and are consistently at or less than 40. Note that if a salaried, non-exempt employee works more than 40 hours in any given week, the employer will have to recalculate the employee’s regular hourly rate and pay overtime on such hours.
- Convert the employee from salaried to hourly paid, creating overtime eligibility but at a reduced hourly rate that takes into account the hours per week the employee normally works. While administratively burdensome, this approach is best (if not mandatory) for employees whose duties may not qualify them as exempt and who routinely work more than 40 hours per week and, done correctly, can practically neutralize the fiscal effect of the new regulations.
Each of these approaches has pros and cons. And until the regulations are finalized, it may not be clear which approach will work best. However, by having the proper information in hand now, management will be in a position to promptly decide on the best course of action once the regulations are finalized, as opposed to making rushed decisions against an unfavorable, onerous and potentially expensive backdrop.
Consult competent, management-side employment counsel as you begin the process of gathering data concerning your exempt classifications for guidance and to protect your self-audit with the attorney-client privilege to the extent possible. Avoid being in the position of guessing how to proceed when the change occurs – a sure path to missteps, confusion and unnecessary spikes in payroll.