The Department of Labor’s (U.S. DOL) proposed change to overtime eligibility is likely to force all employers to review and make changes to their compensation plans prior to the expected 2016 implementation.
Under the proposed rule, the salary threshold under which employees would be nonexempt—required to receive overtime pay (regular hourly rate x 1.5 for all hours worked beyond 40 hours per week), would be $970, or $50,440 per year for a full-time worker, more than doubling the salary threshold from the current level of $23,660. Afterward, the salary-level threshold would be updated annually based either on the percentile or inflation.
Earning above the $50,440 annual ($970 per week) salary level does not automatically classify an employee as exempt from mandatory overtime pay, as the duties test still comes into play.
This is a significant change to the law and all employers should review their plans now, before the likely 2016 implementation period. Don’t wait, as changes will be complex and contain plenty of pitfalls.
To avoid problems with existing exempt workers currently being paid less than the new threshold, your options include:
- Reclassify affected workers as nonexempt, or
- Increase the employees’ salaries to at least $50,440, or
- Reduce the hours of these workers, or
- Pay a lower hourly rate so that, when multiplied by time-and-one-half, weekly compensation remains unchanged
None of these steps are ideal and are likely to result in employee relation issues and increased payroll costs. To make matters worse, the DOL has stepped up enforcement of the law, doling out significant fines, attorney fees and back pay for violations.
Some other problematic areas for employers that should immediately be addressed include:
- Misclassifying employers as exempt, when they should be non-exempt when the duties test is applied
- Misclassifying individuals as independent contractors when they are bona-fide employees
- Failing to pay for “off the clock” work, including non-exempt employees working, unpaid, during breaks; bringing work home; being required to respond to emails, calls and texts, etc.
To avoid problems and lawsuits:
- Audit your compensation program and pay practices for compliance
- Review the classification of all exempt workers, particularly those being paid under $50,440
- Review the classification of all independent contractors
- Put in place a safe harbor policy, which states that if an employee feels he/she has been incorrectly paid, to bring it to your attention for review.
Develop a plan now that can be rolled out in 2016 when (and if) the law changes. Call me if you need help.