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How to Cope with the New Overtime Rule—Even If You Think It's Misguided

Aug. 8, 2016
By year's end, employers will be required to pay overtime to many employees previously defined as exempt.

As of December 1, 2016, the minimum salary threshold for employees to qualify for overtime pay under federal law increases to $913 per week, or $47,476 annually, doubling the current limit of $455 per week, or $23,660 per year.

This means that employers will need to pay overtime to many employees previously defined as exempt—an additional 4.2 million workers nationwide.

Opponents believe the new rule goes too far and fails to account for the complexities of the current business environment and are seeking relief from Congress. Opposition has been voiced by retailers and warehouse operators—and even some left-wing nonprofits not used to paying overtime. But like it or not, employers should prepare for the change long before the December deadline.

Keep in mind that to qualify for the longstanding white collar exemption, employees must be paid at least $913 per week on a salary basis, and must meet the duties test for executives, administrators or professionals. The duties test remains unchanged, but now is a good time to take stock of the duties that exempt employees actually perform so they continue to qualify for an exemption.

An executive is defined as someone who manages overall business operations or a recognized department or subdivision. Administrators perform office or non-manual work that implements management policies rather than supervising or carrying out day-to-day business operations or production activities. Keep in mind that foremen, team leaders and production supervisors don't qualify as administrators. The professional designation applies to someone with advanced knowledge in a recognized field of science or learning, such as an accountant or engineer.

Start by reviewing your payroll, says the law firm of Cozen O'Connor. "Determining how best to address the ballooning population of employees who will be deemed non-exempt under the new rule requires careful, individualized analysis," the firm explains.

After identifying each exempt employee on your payroll paid an annual salary of less than $47,476, the firm says your options include raising their salary above the minimum threshold (assuming they continue to meet the duties test) or reclassifying them as non-exempt so they become eligible for overtime going forward.

If they are reclassified as eligible for overtime, you can adjust their hourly rate to reflect the impact overtime pay will have on their overall compensation, or you can reduce or manage their hours to minimize any overtime costs.

The law firm says another issue to be addressed is your merit increase cycle. Will the December 1 effective date have an impact on your standard cycle for awarding salary increases? If you typically make increases in December this date shouldn't present a problem, but if you make increases at other times of the year you might want to reconsider that schedule.

Helping somewhat is that employers can meet up to 10% of the new threshold through nondiscretionary bonuses and other incentive payments, including commissions, as long as those payments are made on at least a quarterly basis.

Embracing some of these options can have an impact on employee morale, which should be taken into consideration when deciding on a course of action, the Cozen O'Connor attorneys note. While some workers will welcome overtime eligibility, others might consider it a demotion.

Employee reclassification carries the potential for discontent, which can lead to complaints and even litigation. Some previously exempt employees won't understand why they are being reclassified as non-exempt, and might come to believe that they should have been eligible for overtime all along.

To minimize this risk and damage to morale, make sure that you carefully explain why the reclassification is happening and maintain open—but careful—communication with your employees.  

David Sparkman is founding editor of ACWI Advance, the newsletter of the American Chain of Warehouses Inc., as well as a member of the MH&L Editorial Advisory Board.

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