DOL Cooks-Up New Overtime Pay Rules for Salaried Workers
In March, 2014, President Obama directed the Department of Labor ("DOL") to change the overtime regulations to make more employees eligible for overtime. That pot has been simmering on the DOL's stove ever since. Last year, the DOL invited interested parties to submit written comments on the recipe for the proposed rule. There were a lot of cooks crowding the kitchen - over 270,000 comments were received. On May 18, 2016, the DOL declared that dinner was ready, and the agency issued its Final Rule. Employers will need to take note of several key provisions in the Final Rule.
As one would expect, there are some things that employers will find easier to swallow than others, but only time will tell whether this will be the feast for employees that the DOL has touted. Before we dig in, let's set the table. The Fair Labor Standards Act guarantees employees a minimum wage for all hours worked during the workweek and overtime premium pay of not less than one and one-half times the employee's regular rate of pay for hours worked over forty. Certain employees are "exempt" from that premium pay. The Final Rule (over 160 pages) continues to provide a number of exemptions, commonly known as the "white collar" exemptions or ("EAP"). To be considered exempt, an employee must be paid on a salary basis at not less than the minimum amounts set by the regulations; additionally, the employee must actually perform (not just have the duty listed on their job description) the "primary duties," which are specified by the particular exemption in question, i.e. executive, administrative or professional - the so-called "EAP" exemptions. 

In response to concerns voiced by employer groups, the Final Rule leaves intact the current duties tests and achieves its stated goal of increasing the number of employees eligible for overtime by doubling a main ingredient - the minimum salary threshold required to meet the OT exemptions.

The key provisions:
  1. Under the DOL's Final Rule, the salary threshold has been increased to $913 per week or $47,476 annually. This more than doubles the salary set at $455 per week, $23,660 annually in 2004. The DOL set the new salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South;
  2. The total annual compensation requirement for exempt highly compensated employees ("HCE") subject to minimal duties test will increase to $134,004, which is the annual equivalent of the 90th percentile of full-time salaried workers nationally. It was previously set at $100,000;
  3. The minimum salary and compensation thresholds will automatically increase every three years to maintain the levels at the above percentiles; and
  4. Employers may use nondiscretionary bonuses and incentive payments (including commission) to satisfy up to 10 percent of the new standard salary level, provided they are paid at least quarterly.
Effective date: December 1, 2016. (Note that this is a Thursday for payroll planning.)

The DOL estimates that an additional 4.2 million workers will "either gain new overtime protections or get a raise to the new salary threshold."   The DOL also estimates 101,000 of those employees are in Michigan. Of course, there are options available to employers other than raising salaries to $47,476, which the DOL does not seem to consider. For example, employers might reduce employee hours or reclassify employees and set their wages at a rate such that the total amount of pay to the employee remains the same. Many employers may have to engage in new strategic planning. But the greatest heartburn for employers may come from closer scrutiny of whether employees are actually performing the requisite duties to meet the EAP exemptions, an ingredient the DOL did not change.

What to do now?
It's time to check your own stove to make sure things don't boil over come December 1, the effective date of the DOL's Final Rule:
  • Audit your workforce to identify those employees affected by the increase in the salary threshold;
  • Analyze whether the requirements of the "white collar" or "EAP" exemptions relied upon in the past are actually being met;
  • Review compliance options, for example, whether to reclassify as non-exempt and how to determine and calculate pay;
  • Analyze whether increasing  salaries to maintain exempt status is viable;
  • Determine how hours will be tracked;
  • Consider other compensation alternatives to ensure compliance and manage payroll costs and legal risk; and
  • Protect your audits and analyses from disclosure by engaging legal counsel to provide guidance and legal advice.
Brian A. Kreucher is a management side Labor & Employment attorney with Howard & Howard in Royal Oak, Michigan. For over 25 years he has been helping employers minimize legal risk involved in employment decisions while still achieving their business goals.   

Listen to Brian's interview regarding the new OT rules that aired on NPR:

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Brian A. Kreucher  is a Member of Howard & Howard Attorneys PLLC and the Labor, Employment and Immigration Practice Group.
Brad Rayle  is a Member of Howard & Howard Attorneys PLLC and the Labor, Employment and Immigration Practice Group.
Daniel Villaire  is a Member of Howard & Howard Attorneys PLLC and the Labor, Employment and Immigration Practice Group.