Watch Out Employers: Overtime Rules Are Changing in a Big Way

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changes to 2016 overtime law

Overtime Litigation Update: August 31, 2017 – A court ruled that the Final Rule invalid.  Finding that the Dept. of Labor’s salary level exceeded their authority  (State of Nevada, et al. v. United States Department of Labor, et al., No. 4:16-CV-00731).  More information pending.

What does this mean for your business?  Uncertainty and confusion.

The U.S. Department of Labor is expected to change the minimum salary requirements and primary duty rules for exempt employee classification later this summer, and the change is expected to begin a domino effect leading to systemic changes for employers and employees.

Already, companies have begun looking at each employee’s current classification as hourly or salaried, analyzing their duties and pay, and considering how the change will affect this.

Employees could expect a pay raise with additional administrative or supervisory duties, a shift in their current duties, shortened hours leading to less take-home pay, or a combination of these.

At the same time, employment lawyers are considering how this change will alter the most common claim types, and should expect a significant rise in claims over improper classification in the months and years following the change.  You can view the DOL notice for the proposed changes here.

The Fair Labor Standards Act and Employee Classification

The Fair Labor Standards Act (FLSA), signed into law by President Franklin D. Roosevelt in 2938, outlined federal regulations regarding paying employees for overtime for the first time. Under this act, some high-earning employees — mostly executives and administrative employees — are exempt from overtime pay no matter how many hours they work per week.  You can read more about the legality of mandatory overtime here.

These employees, known as “exempt,” must meet a specific list of qualifications in order to be classified this way. According to the FLSA, this includes:

  • Receiving a set salary, no matter how many hours are worked per week
  • Meeting specific minimum salary requirements as defined in the act
  • Performing certain tasks which fall under management, administrative or professional duties

The Proposed Changes

President Barack Obama signed a Presidential Memorandum calling for the modernization of the FLSA’s minimum wage and overtime standards in March of 2014. The regulation changes, as proposed by the U.S. Department of Labor, were published in July 2015 and made available for comment through September of last year.

While they have not yet been officially approved, these changes are expected to be adopted with only minor modifications, if any. They go into effect later this summer.

The proposed changes alter the minimum salary requirements for overtime exempt employees, as well as how the workers’ exempt status is affected when they spend a majority of their time focused on non-exempt tasks.


Changes to Salary Minimums

These changes are necessary, according to the original memo signed by the President, because the original overtime exemption rules had no built-in way to handle inflation or other economic changes. These rules, originally designed to apply only to high-earning or highly specialized employees, now allow employers to pay exempt employees as little as $23,660 per year.

The current minimum pay for an overtime exempt employee is $455. Making less than $24,000 a year, many of these employees put in more than 40 hours a week and still struggle to rent or buy a home, or have families.

The 2016 poverty threshold for a family of four is, in fact, above this level at $24,300. The Department of Labor last updated the minimum salary requirements in 2004, but this was simply a small increase and not the sort of overhaul necessary to modernize the FLSA.

The new standards would raise the minimum salary requirements for an employee to be classified as exempt, in addition to putting a system of checks and balances in place so that this minimum increases as necessary.

In the proposal, the new minimum salary requirements are listed as $970 per week, or $50,440 annually.

There are currently about 5 million employees in the United States who are listed as exempt but would not meet this income minimum, according to the U.S. Department of Labor.


Changes to Duties of Exempt Employees

Under current FLSA rules, an employee’s exemption is based on their primary duties, regardless of how much time they spend on other duties that do not fall under the umbrella of exempt tasks. This often comes into play when a manager of a restaurant or store spends much of the day assisting customers or working the register.

Because the assigned primary duty is to supervise employees during the shift, he or she currently qualifies as overtime exempt. This is true no matter how little time is spent with supervisory tasks.

The proposed rules, however, would change this.  Modeled after California’s overtime laws, the new national standard would take into account the time spent on non-exempt tasks.

Under the so-called California Test, employees must spend more than half of their time on exempt tasks in order to be considered an exempt employee.  If, instead, an employee spends more than 50 percent of his or her time in customer service, stocking shelves or running the register, the employee would be eligible for overtime pay.

This change will prevent employers from overworking exempt employees to save money. Some exempt employees are currently required to work long hours doing mostly non-exempt tasks, because they do not have to be paid overtime for extra hours worked.

This will likely force employers to hire and pay additional hourly staff to complete the non-exempt tasks now being completed by supervisors and other exempt staff.


Impact of Proposed FLSA Updates

Once employers determine which employees will be affected by the proposed changes, they will have to make decisions on how to ensure they remain compliant or face potential unpaid overtime lawsuits.

Some may offer pay raises to those who are close to the minimum cut-off and already focus primarily on exempt tasks.

Others will transition affected employees to non-exempt positions where they work fewer hours for hourly pay. Some may offer their employees a lower hourly pay and expect them to work overtime in order to earn the same amount they currently earn.

Many employers — particularly in restaurants, shops and the fast food industry — are already looking into their options, considering whether to reclassify employees and how these changes will impact their business.

Employment lawyers are preparing for the change. These changes will greatly broaden the pool of employees eligible for overtime pay, and many employers may be understandably hesitant to pay out.

The changes in duty requirements may especially impact their practices, with a huge increase in misclassification cases expected over the next few years leading to unpaid overtime claims and other employment law violations.

Exempt employees expected to do some clerical work and other non-exempt tasks will have a hard time meeting the 50 percent threshold, and employers are almost certain to push the limits or search for loopholes to reduce their liability.


The Importance of Avoiding Violations

Human resources departments across the country are busy educating their company’s top brass on the changes, and the importance of avoiding overtime violations. Improperly classified employees, even by accident, can cost a company thousands of dollars.

Employees have two ways to remedy the situation if they believe they are owed overtime. They can file a complaint with The Wage and Hour Division of the Department of Labor, or they can file a civil suit against the employer.

If the DOL or court finds the employee was misclassified, they can often receive much more than just back pay. With the DOL, the employer must provide back pay and “liquidated damages,” which often doubles the payout.

In a civil suit, the court can award back pay, damages and legal fees.

Rarely, though, is only one employee misclassified. Usually, it is all employees in a specific position or group of positions who are affected. This means that overtime violations in a single position could cost a large corporation millions.

In one example, Wal-Mart agreed to pay $4.83 million in back wages and damages after misclassification led to overtime pay violations in 2012 (HuffPo). Only two positions were affected by the misclassification: Wal-Mart and Sam’s Club Vision Center managers and the stores’ asset protection coordinators. However, because the corporation has more than 3,900 stores in the U.S., backpay and other damages were paid out to more than 4,500 employees from across the nation.

Some employment law experts are predicting an almost 8 percent increase in employment law civil suits and related claims due to the tightening of the rules on who can be classified as overtime exempt, according to Fortune.

Make no mistake, employment lawyers are eagerly anticipating the changes, businesses that don’t rush to ensure compliance with the new overtime regulations will be in the cross hairs.

The proposed changes can be viewed in full on the Department of Labor website.


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