What Is The New Federal Overtime Rule?

Much like a pair of Birkenstocks or disco music, federal overtime law has hardly been updated since the 1970s.

But with the Department of Labor's recent announcement, it appears that this is about to change. The new ruling affects the fates — and pocketbooks — of millions of low- and middle-income Americans who may be eligible for an increase in pay.

And of course this announcement has a major impact on management, investors, and owners at businesses of all types and sizes around the country.

A Little Background

Before getting into the specifics of the new overtime laws, let's briefly review exempt and nonexempt status for employees.

Generally, employers are expected to pay overtime to employees working more than 40 hours a week. However, there are exemptions to that requirement for employers. An exempt employee is not entitled to overtime pay, while a non-exempt employee must receive overtime pay.

To be exempt, employees must make a certain salary (currently at least $23,660 annually), receive that salary regardless of work quantity or quality, and perform specific job duties.

In theory, anyone earning an average or below-average salary would remain nonexempt. As you'll see, that isn't necessarily the case.

The Overtime Problem

Right now, a full-time, salaried, "white collar" (characterized as executive/administrative/professional) employee with an annual income of $23,660 is not guaranteed overtime pay.

So, a retail store manager or entry-level office worker, for example, could work more than 40 hours (50, 60, 80!) a week and still earn poverty-level wages for a family of four.

Furthermore, many of these employees are also exempt from federal minimum wage requirements.

It's true that states can have their own overtime laws, and may be more inclusive of and generous to employees. But this doesn't mean much to a low-earning exempt employee in, say, Alabama, which adheres to the federal standard.

Overtime protections are part of the Fair Labor Standards Act (FLSA) and haven't been touched since 2004, and the job duty requirements of exempt employees have not been updated since 1940.

Despite the relatively slow movement on new regulation, key members of the business community are against the new rules. According to the Chamber of Commerce's Marc Freedman, "Changing the rules for overtime eligibility will, just like increasing the minimum wage, make employees more expensive and will force employers to look for ways to cover these increased costs." Given challenging macroeconomic conditions, a competitive global marketplace, and a fickle retail outlook, business challenges to this law aren't going away anytime soon.

The New Overtime Rules

In an effort to address the issues of income inequality, chronic low wages, and work/life balance, the Obama administration took the initiative on overtime pay in March 2014.

President Obama signed a presidential memorandum directing the Department of Labor (DOL) to update the regulations around which white collar workers are entitled to overtime pay.

The DOL held several listening sessions, giving stakeholders (such as employers, employees, unions) a chance to comment on salary levels, what employees should be affected, and how to simplify the regulations.

On May 18, 2016, the Department of Labor published the new rules. It suggests the following about full-time, salaried employees and overtime pay:

• The new salary level to be considered exempt from overtime pay is $47,476 – the 40th percentile of salaried workers in the South. In addition, only 10% of that pay may come from commissions, bonuses, or other incentive payments.
• Those at the 90th or higher percentile of weekly earnings ($134,004 annually, up from $100,000) count as highly compensated employees and may be exempt from overtime protections.
• These salary thresholds will be updated every three years. Updates will be made to the 40th percentile of salaried workers in the lowest income region in the country, ensuring that employees are always protected from this type of overwork and underpay

Finally, in contrast to what was expected, the new rules will not go into effect until December 1, 2016.

Why Should You Care about the Federal Ruling?

Obviously, this means big changes for employees and employers. For employees just starting out or supporting families on modest wages, the updated protections could be a windfall.

For employers, however, the benefits are less direct. While we wait for the proposals to take effect, many employers are scrambling to find money in the budget to pay for overtime hours, or determine whether or not to raise employee salaries.

Additionally, law firms, like wage-and-hour litigation practice Seyfarth Shaw, are arguing that this new regulation will drastically increase the number of overtime law suits. Will this new law place employees under an additional burden of compliance? Most likely, yes.

Who’s Opposed to the Overtime Changes?

Lots of people! The National Retail Federation, the (aforementioned) Chamber of Commerce, the National Federation of Independent Businesses, and dozens of other influential trade and employment associations are against this ruling. Many of these organizations are part of the Partnership to Protect Workplace Opportunity (PPWO), who sent a letter to Congress asking it to work with the Obama administration to reconsider the law in December 2015.

The PPWO says that the changes will be burdensome to employers and eventually have consequences for employees.

Although opposed parties understand the reasons behind the proposal, they are unsatisfied with how it will likely be implemented.

The letter from the PPWO suggests that rather than raising the threshold to roughly $50k right away, and expect employers to comply within a few months, the DOL should start with a $35,000 threshold and phase that in over several months or even years.

How Companies Can Prepare for the Overtime Law

For certain organizations, bringing all employees up to the $47,476 threshold might be the simplest solution. Another option could be shifting overtime work to highly paid exempt employees.

At the other end of spectrum is using more contract workers and paying entry-level employees less (in hopes that any overtime brings them back to where they would have been anyway).

Of course, this could mean a slew of red tape and employee dissatisfaction.

Since the new regulations will probably be finalized later in 2016, some in the human resources industry assume they won't actually be in practice until 2017.

Either way, businesses need to start getting prepared for the new overtime reality.

Time to Start Tracking Time?

Ah, yes. Everyone's favorite thing: time tracking. With the need for increased compliance, tracking employee time has never been more relevant.

Some employers might be afraid to track salaried time, thinking it will change the status of exempt employees. This is not the case.

Employers are fully allowed to track the time and schedules of exempt employees as long as the findings don’t impact those employees' salary.

Granted, you'll need to be ready for salaried employees to push back if you suddenly ask them to track their time.

We have some tips on how to make sure your team is properly tracking their time.

You'll want to pay special attention to those employees who will be newly entitled to overtime, once the law goes into effect. This is where you'll need to make decisions about your team and budget, and nothing beats solid data.