New DOL Rule Means Major Changes in Overtime Policies

 

Employers, it’s here: The DOL has finalized the rule to increase the salary floor for workers to be eligible for overtime pay when working more than 40 hours a week. Since 2004, that threshold was $23,660 per year. Now, it’s $47,476. While the rule doesn’t go into effect until Dec. 1, the time for¬†strategizing is now.

How will this work?

Salaried workers earning up to the new threshold will have to receive overtime pay, usually time and a half. How will you deal with the change? Many employers will have to pick one or more of the choices below:

  • Raise the salaries of managerial workers to come up to the new rate so that there’s no overtime pay to deal with.
  • Limit the hours affected employees work so that they no longer work over 40 hours per week.
  • Lower the base wage for workers who get overtime so that their overall compensation, including overtime pay, will remain the same. (This is likely to irritate many employees who would have to work longer hours for the same pay, however.)

What’s really changing?

This new rule is about the pay level that triggers overtime; the principle of exempt vs. nonexempt employees isn’t changing.

Basically, there are two ways to decide whether an employee is entitled to overtime:

  • The duties test. This test determines whether employees are bona fide executives, administrators or professionals. In other words, do they have significant decision-making authority? If not, they are supposed to be eligible for overtime pay. This method, widely open to interpretation, is not changed by the new rule. In fact, it is possible for workers to earn more than the new threshold and still be entitled to overtime if they don’t pass the duties test.
  • The salary level test. This is what has changed. Previously, anyone not meeting the $23,660 threshold was automatically entitled to overtime. This hasn’t been especially confusing, because few workers making that little had any managerial responsibilities. Now, it’s $47,476, and many employees who were considered “managers” under the duties test will no longer be considered as such under the salary level test. So even if they have a manager’s title and a manager’s duties, they are now entitled to overtime pay if they don’t meet the $47,476 threshold. (Employers should note that bonuses and incentive payments will count toward up to 10 percent of the new salary level.)

The highly compensated employee threshold is also raised from $100,000 to $134,000, above which only a minimal showing is needed to demonstrate that the employee is not eligible for overtime.

Whom does this effect?

There’s a lot of scuttlebutt that workers who consider themselves managerial or professional will scoff at now having to clock in and count hours, which, some say, will make them feel demoted. But they will at least be entitled to overtime.

Consider, for example, those working at Denny’s as managers. Let’s assume their base salary is lower than the new threshold, but because they’re managers, they haven’t been getting overtime even when they work 50 hours a week. But now they’re eligible.

Indeed, more than 60 percent of salaried workers qualified for overtime in 1975, while only 7 percent do today. The new regulation is set to be updated every three years to keep pace with inflation and pay rates.

Only certain workers are excepted from the new rule: teachers, doctors, lawyers and outside sales reps. Academics primarily engaged in research will not be excepted.

What will this cost?

The new threshold could lead to billions of dollars in cost to employers. The Labor Department calculates that 4.2 million workers will be eligible for overtime, while others put the number of workers substantially higher. It is expected to boost wages for workers by $12 billion over the next 10 years.

How will it affect your business? You’ll have to take a look at your payroll. One thing you should not do is ignore this.

There are movements in Congress to block this new threshold, and there’s always a chance a newly elected president will want to roll back this change. However, it’s very dangerous to play a waiting game, and it would be wise to assume the rule will go into effect on Dec. 1.

 

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