Until very recently, the United States Department of Labor (DOL)s capped overtime eligibility at $23,660. Under this guideline of the Fair Labor Standards Act (FLSA), full-time white-collar workers earning an annual salary of $23,660 or more could not earn time-and-a-half pay for hours worked in excess of 40 per week. The DOL established this threshold in 2004—the last time it updated federal overtime regulations.
While this key aspect of the Fair Labor Standards Act (FLSA) was designed to ensure that workers receive fair compensation for their time, in recent decades, it has failed to keep up with inflation. Whereas 62 percent of full-time workers were eligible for overtime pay in 1975, this number has since fallen to 7 percent.
Seeking to create an overtime framework that better matches the current economic climate, President Obama signed a Presidential Memorandum directing the DOL to update its overtime rules in 2014. The Department of Labor began soliciting public commentary on its revised regulations in July 2015 with the publication of a Notice of Proposed Rulemaking. By September, the regulatory body had received over 270,000 comments from a diverse array of interested citizens, and it drew on these suggestions to finalize its new overtime rules.
Ensuring Extra Pay for Extra Hours Worked
On May 18, 2016, the Department of Labor released the final draft of its rule updating overtime exemption regulations. The updated regulations also set new standards for determining the salary of highly compensated employees, in addition to expanding the scope of the current salary basis test. But most notably, the updated rule more than doubles the salary threshold for overtime-exempt employees, increasing it to $47,476, or $913 per week. Previously, the salary threshold amounted to just $455 per week.
The DOL based its new overtime exemption threshold on a very specific standard. Under the new rule, the salary threshold must be set at the 40th earning percentile for full-time workers in the US census region with the lowest wages. Currently, this region is the South. Thanks to the increased threshold, over 4 million American workers in executive, administrative, and professional positions will be newly eligible for overtime pay.
Moreover, the new rule requires the federal government to update the overtime exemption threshold every three years based on inflation. Current wage growth projections indicate that this could raise the threshold to $51,000 when the first three-year update occurs in 2020.
In order to comply with the DOL’s new rules, employers must modify their payroll structure to meet the revised regulations by December 1, 2016. This poses a variety of new considerations for companies, and the Department of Labor estimates that businesses will spend around $250 million yearly to ensure compliance. In addition, the new regulations could increase wages by as much as $12 billion over the next decade.
Many human resources industry groups suspect that adjusting pay structures to comply with the new standards will be more time consuming than the government predicts. Regardless, there are several avenues that companies may take to ensure their overtime compliance, and all benefit from the expertise of human resources professionals.
Across various business sectors, the new overtime rule has initiated an increased focus on hours worked. After first determining which employees and roles will be newly eligible for overtime protections, human resources professionals should ensure that there is a dedicated system in place for tracking the time worked by hourly employees, as well as the overtime hours worked by eligible salaried employees. This may involve leveraging new technologies to ensure accurate timekeeping, and it will likely require additional employee communications and training.
Human resources teams can help guide their firms through a variety of compliance options. Employers may choose to begin paying overtime to employees who are newly eligible for it, keeping their weekly hours the same. To avoid paying overtime under the new rule, companies can also raise the salary of nonexempt employees to meet the new threshold. For salaried exempt employees who regularly work more than 40 hours per week, employers might also consider adjusting these employees’ salary to achieve a nonexempt status, then begin paying them overtime for excess hours work. As another option, companies could institute a fluctuating workweek with a set overtime-exempt salary designed to account for occasional overtime.
As companies work toward compliance, it may be necessary for human resources departments to discuss the new rule with employees to request that they limit their hours to 40 per week, or to establish new approval processes for overtime. This may involve reassessing employees’ workloads and setting clear policies for the use of smartphones for work activities outside of office hours. In some cases, businesses may hire new part-time employees to work the hours previously covered by overtime. Employers may also choose to shift newly eligible salaried workers to hourly pay structures in order to more carefully track their overtime hours.
All of these cases will require human resources professionals to draw on their understanding of the new rule to effectively explain it to employees, who may consider the shift from salaried to hourly as a demotion. In these situations, human resource professionals may find it useful to frame the change as not only a matter of compliance, but also a way to ensure a healthy work-life balance.