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DOL overtime changes expected to boost the wages of millions

Legal News Reporter

Published: June 21, 2016

It’s been about a dozen years since the U.S. Department of Labor (DOL) updated the salary threshold rules that employers use as guidance, along with other factors, to help decide whether white collar and other workers are entitled to overtime pay.

But that all changed last month, when the DOL’s new final rule was announced, which will automatically extend overtime pay protections to over four million workers within the first year of implementation.

Rachel Reight, a partner who works out of the Canton office of Baasten McKinley & Co and represents employees, said she is pleased by the changes.

“Under the old rules many salaried employees who worked over 40 hours a week were not entitled to overtime,” said Reight. “The new rules have nearly doubled the amount of overtime pay for eligible employees to receive.

“Eligible employees working these extended hours may see their pay increase dramatically,” she said. “These changes have the potential to improve the lives of millions of people.”

Richard Millisor, a partner who works out of the Cleveland office at the management-side labor and employment law firm Fisher Phillips, said the changes that are scheduled to take effect on Dec. 1 could devastate many employers.

“These changes will likely impact most employers but especially nonprofits and the retail and food industries,” said Millisor. “By virtue of the, in essence, arbitrary increase in the salary threshold, many employees who meet the duties requirement of the white-collar exemption will now qualify for overtime.”

Reight said that while there is no exception to the changes for nonprofits, only those organizations with an annual dollar volume of sales or business of at least $500,000 would be impacted.

“Only activities performed for a business purpose are considered and not charitable, religious, educational or other activities of organizations operated on a nonprofit basis where such activities are not in substantial competition with other businesses,” she said.

Under the Fair Labor Standards Act (FLSA), most employees must be paid at least federal minimum wage for all hours worked and overtime pay at 1 1/2 times their regular rate for all hours over 40 in a workweek.

According to Millisor, under Section 13(a)(1) the FLSA provides an exemption from both minimum wage and overtime rules for a person employed as a “bona fide” executive, administrative, professional or outside sales worker.

To qualify employees generally must meet certain tests regarding their job duties.

Reight said in addition to the “duties” required for each of these exemptions, exempt employees must also make over a designated salary threshold and their compensation may not be tied to the quality or quantity of their work.

The current salary threshold has remained at $455 per week/$23,660 annually since 2004, which Reight said “falls below the current federal poverty line of $24,008 for a family of four.”

It was back in 2014 when President Barack Obama signed a presidential memorandum directing the DOL to update the regulations that define which white collar workers are protected by the Fair Labor Standards Act’s minimum wage and overtime rules. On July 6, 2015 the DOL published a notice of proposed rulemaking in the Federal Register, asking interested parties to submit written comments by Sept 4, 2015.

Under the original 2015 proposal, Millisor said the minimum threshold amounts would have gone up to $970 per week/$50,400 annually and automatic increases would have kicked in on an annual basis.

“The DOL received over 270,000 comments in response to the proposed Rule,” said Millisor.

Under the new final rule, Millisor said the duties test will not change, but the salary threshold will rise from a maximum of $455 a week to $913 and from $23,660 to $47,476 annually. Employers will be allowed to satisfy up to 10 percent of the threshold with nondiscretionary bonuses and incentive payments, including commissions, as long as they are paid on at least a quarterly basis.

“The DOL lowered the threshold slightly and allowed some of the difference to be made up by bonuses and incentive payments, which will help employers,” said Millisor.

According to Reight, “The new federal regulations do not define ‘nondiscretionary’ but another part of the FLSA (29 C.F.R. §778.211), provides some guidance.” She said the section discusses which bonuses may be excluded from the “regular rate” to calculate overtime pay.

“A bonus is nondiscretionary if an employer commits to it in advance or provides the amount or method of calculation in advance,” said Reight. “This is one of those issues that may result in litigation or the need for further guidance from the DOL.”

Millisor said the final rule also increased the salary threshold for the Highly Compensated proviso, which contains a less stringent duties requirement, from $100,000 to $134,004 per year.

In addition, beginning on Jan. 1, 2020, the salary threshold will automatically update every three years.

Reight said requiring salary threshold revisions is key since without them the rules could remain stagnant for years. “That is what has happened in the past,” she said.

While some employees may welcome the amendments, Millisor said going from exempt to nonexempt could also mean an adjustment in an employee’s work-life balance.

“Exempt employees do not have to worry about clocking in or out,” said Millisor. “An exempt employee who leaves early to go to a soccer game will not see a loss in pay. But a nonexempt worker who leaves the office early may now see a reduction in their pay if they are converted to an hourly nonexempt status.”

However, he said it is employers who will face the greatest dilemmas.

“Plenty of workers will not exceed the new salary threshold but still meet the duties test and yet they will no longer be exempt,” said Millisor. “If the employee’s compensation is less than the new salary threshold, an employer still has to pay overtime even though the employee’s job satisfies the ‘duties’ tests of the white-collar exemption.

“It is very important that employers become aware of these new rules so that they do not wind up in court,” said Millisor.

He said employers must come up with a plan by Dec. 1 to be in compliance with the new rule, which “should be shaped by the employer’s unique culture, competitive situation and workforce.”

The good news, he said, is that employers have several options available to them.

“Even with a new overtime requirement, an employer could develop a cost-neutral plan without reducing hours worked, but the employer should obtain legal advice to ensure the new compensation structure complies with the law,” said Millisor. “The legally required overtime computation, however, will differ based on the compensation system adopted by the employer.”

Reight said employees too must become aware of their rights to ensure that the new overtime requirements are properly implemented.

“Eligible employees who work eight hours deserve to be paid for eight hours; eligible employees who work greater than eight hours deserve to be paid greater than eight hours,” said Reight. “These changes also create an incentive for employers to create more jobs and would more fairly compensate those employees who do work more than 40 hours. These changes promote fundamental fairness in the workplace and expand protections to millions of workers.”