Understanding the new overtime regulations as employers

UPDATE: On Nov. 22, 2016, a federal judge in Texas issued an injunction blocking the implementation of the new overtime law. Whether or not this is a temporary or permanent hold on the new overtime rules remain unclear, and it also puts employers that have already made changes in a tough spot. We encourage you to read on to gain a better understanding of the Department of Labor's current and planned regulations.

On Dec. 1, 2016 a new Department of Labor regulation goes into place that raises the salary threshold for paid overtime from less than $455 per week to $913 per week. Under the previous rules, salaried “exempt” workers were only entitled to overtime if they earned less than $23,660 per year.

The new regulation puts this threshold at $47,476 per year, and the DOL will automatically update this salary requirement every three years to keep up with inflation. If your company has salaried workers that make less than $47,476 per year, the DOL suggests the following remedies:

  • Pay time-and-a-half for overtime work (requiring the employer to switch the employee to an hourly rate).
  • Raise salaries to above the new threshold.
  • Limit worker hours to 40 per week.
  • Some combination of the above.

Unfortunately the rules are not as simple as the DOL makes it seem. There are a number of facets and exemptions to this rule, and what applies in one industry can vary widely from another. We spoke with labor and employment lawyer Kevin Doherty of Greenwald Doherty LLP, about some of the misconceptions regarding this rule and what employers need to be aware of.

Simply raising an employee salary to meet the $913/week threshold doesn’t necessarily make them exempt.

Say you run a creative marketing agency, and one of your social media managers falls just short of the $47,476 annual salary threshold. Can you simply raise their salary to $48,000 to meet the requirements? Not necessarily the case, says Doherty. It depends on what their job entails.

“First, an employer has to examine whether the employee was correctly classified as exempt in the first place. An employee’s duties are what make the employee exempt under the FLSA (Fair Labor Standards Act),” Doherty explains.

“The problem is that especially in the areas surrounding major metropolitan areas, if an employee was making less than $47,476, the likelihood was that they were not performing sufficient duties of an exempt nature in the first place. If you raise someone’s salary and that person is not exempt due to his/her duties in the first place, you are only increasing your overtime liability should the employee challenge his/her exempt status in the future.”

While exemptions exist for many “white collar” workers, simply working in an office does not make you exempt. Employees must meet the “duties test” as laid out in the law, and it’s not especially clear cut for people who work in fields such as marketing, publishing, consulting, and other creative industries. There are a lot of “gray area positions,” as Doherty calls them, because many people equate being professional with being salaried, even though by law they are not exempt.

Because the rules are extremely specific, don’t assume that you can simply do what everyone else in your industry is doing. To ensure that your employees are correctly categorized as exempt or non-exempt, speak to an expert professional that help you determine whether their duties fall under the exemption categories.

“Before making any changes, companies should weigh all their options based upon the true nature of each employee’s position before deciding on the correct course of action.  Businesses need to determine how to both limit the future financial impact of any switch and reduce the likelihood that any changes will prompt claims for unpaid overtime,” says Doherty.

Overtime calculations are strictly based on a 40-hour workweek.

Under federal laws, overtime is calculated based on the number of hours worked per week; this cannot be averaged over a month or other periods of time. According to Doherty, “Employees must be paid the correct overtime rate for all hours worked in excess of 40 in a workweek. Employers cannot spread the hours worked over a longer period of time, even if their pay period is bi-weekly or monthly.”

For example, if an employee works 50 hours in one week and 30 hours the following week, the employee must be paid for 70 hours of regular pay and 10 hours of overtime.

However, overtime is based solely on the hours that an employee actually works, so paid leave or holidays do not factor into overtime calculations. For example, if an employee works 34 hours in a workweek and also receives a paid holiday of 8 hours (for a total of 42 hours), the employee would not receive overtime because actual time worked does not exceed 40 hours.

Employers can still pay a salary to non-exempt employees, but will still have to track hours and pay overtime for hours worked in excess of 40 per week.

In certain cases, companies may decide that in order to better retain employees or reduce turnover, they want to pay salaries instead of hourly wages. This is fine, according to Doherty. However, employees that don’t meet the exemption rules based on the “duties test” will still have to track hours and pay overtime for hours worked in excess of 40 each week.

In such cases, employers in most instances would have to calculate the overtime rate by taking the weekly salary and dividing it by 40, then multiplying the hourly rate by 1.5.

It is the employer’s responsibility to track and keep records of employee hours.

No matter what method you choose, whether it’s traditional punch clocks, tracking door access keys, or computer software, or asking your employees to submit self-reports, it’s the company’s responsibility to track the hours of non-exempt employees.

“You have an obligation to keep time records, and you can be fined if you don’t have them,” says Doherty. These records are also important for protecting the employer, in case of an overtime lawsuit. “If there are no time records, it’s on the employer to prove the employee wrong.”

Of course, the other benefit to keeping good time records is that you can measure employee productivity and ensure that employees do not have to work overtime in order to complete their work.  

State laws requiring higher salary minimums may override the FLSA regulations.

Depending on which state you conduct business in, and which states (or even cities) your employees work in (for businesses that allow telecommuting, for example), your company may be subject to more stringent overtime laws.

New York, for example, has historically kept higher salary requirements and higher minimum wages than its other counterparts. (The current salary requirement for exemption is $675 per week, until the new FLSA law goes into place.) If New York chooses to raise this requirement higher than the federal one, companies operating in New York will have to meet the state minimums.

Non-compliance to the overtime law could result in serious penalties.

According to Doherty, “Under the FLSA, should a company be found to have not paid the required overtime to its employees, a company must pay the unpaid overtime, an equal amount in liquidated damages, as well as the employees’ attorneys’ fees and costs.  Usually these cases are brought by multiple employees at once, so the damages can be substantial when added together.”

Staying in compliance

Although the new overtime salary threshold has drawn serious criticism from the business community and multiple lawsuits from various states, and despite the views of incoming President Donald Trump and the Republican-leaning Congress on loosening business regulations, Doherty doesn’t see any immediate changes happening to the current regulations. “It would likely take considerable time even if Trump tries to enact regulations to rescind the new amendments,” he says.

“The minimum salary threshold is supposed to increase every three years, so that part of the amended regulations may be in jeopardy.  There has been some mention by Trump of perhaps exempting small businesses form the increased salary level, but I have seen no specifics of what that would mean and who would be affected.”

He predicts that if any FLSA changes happen at all during at a Trump administration, it may be to curb the large number of multi-plaintiff and class action overtime lawsuits. But of course, varying state laws (some more liberal than the FLSA itself) mean that the impact of such changes would depend on where a company does business.

“In any event, employers should definitely work to come into compliance as soon as possible,” says Doherty.

Click here to learn more about overtime pay regulations, or visit www.greenwaldllp.com for more information. The information contained in this article is for informational purposes only and does not constitute legal advice.