5 ways to prepare your business for new overtime laws

The U.S. Department of Labor (DOL) is likely to pass changes to the Federal Labor Standards Act (FLSA) this year that will affect over one-million employees in the U.S. The FLSA is the federal law addressing minimum wage, overtime pay, child labor regulations and record-keeping rules. Earlier this year, the DOL proposed raising the salary threshold for exempt employees from $455 per week (as established in 2004) to $679 per week. That will bring the qualifying salary level to $35,308 per year. The DOL also proposed requiring periodic reviews and updates to the salary threshold. Yet, businesses need to remember that determining whether employees are exempt is far more complicated than a salary review alone.

The FLSA allows for several classes of employees to be exempt from overtime pay. Employers can run into very costly trouble when they inadvertently designate non-exempt employees as exempt. The federal Department of Labor has defined exempt employees in somewhat complicated ways, so it’s important to know the law before you classify workers as exempt. Incorrect designations can cost your business time, energy and a lot of money from penalties and attorneys’ fees.

Exempt or non-exempt?  That is the question

There are two main questions an employer must ask to determine if employees are exempt or non-exempt: 1) what is the salary of the employee? and 2) what are the employee’s duties?

It is commonly understood that all hourly workers must be paid overtime if they work more than 40 hours per week. It is often assumed, therefore, that salaried employees are not entitled to overtime. In fact, the current regulations require that any employee with a salary below $455 per week ($23,660 annually) is due overtime. If an employee is salaried above this threshold, an employer has to review the employee’s specific job duties to determine whether an exemption applies.

You will need to perform a “duties test” to determine if a salaried employee’s role requires overtime pay or not. A rough rule of thumb to examine is whether the employee is making independent, authoritative decisions about your business.  If not, the employees are most likely non-exempt and must be paid overtime pay (time and a half) for all hours worked over 40 hours in any work week. These employees often constitute the majority of a business’ workforce. At the same time, employees with discretion and authority over critical aspects of the business are typically exempt, and not eligible for overtime. The key point is that having a few management duties is not enough to be exempt. Employees must have actual discretion and authority in their roles.

Exempt job categories

To help with classification, the DOL has identified certain job categories that are exempt. Foremost among these exclusions are the “white collar” or “EAP” exemptions, so-called because they apply to “executive, administrative, and professional” positions. They also apply to “outside sales” roles and “computer employees.” While the definition of outside sales employees may be simple, the DOL has created some confusion with its definitions of “executive,” “professionals,” “administrative,” and “computer employees.”

To be exempted, “executives” earning over the salary threshold must primarily focus on management duties, hiring, firing and promoting his/her direct reports. “Professionals” must be in jobs that require a specialized level of education, such as lawyers, doctors, accountants, engineers and other employees performing work that requires “advanced knowledge.” One of the most difficult categories to analyze is the administrative exemption, which applies to employees with a high level of authority who have responsibilities directly related to the management or operations of a business. There is a lot of room for confusion with this exemption and it is critical for business owners to be cautious in its application.

Artists, actors, musicians and writers also fall under the “professional” exemption. These creative professionals must heavily rely on “invention, imagination, originality or talent” in their work, as opposed to “routine” mental or physical labor, even if it entails the use of “intelligence, diligence and accuracy.”

The main distinguishing factor is creativity or originality. A composer would be exempt, for example, whereas a musician hired merely to play back-up to a lead act likely is not. An investigative reporter who directs his or her own work would almost certainly be exempt from being paid overtime, but a writer who merely gathers public information into an article that must be reviewed by a boss would not be. These are examples are cited in FLSA regulations, revealing just how detailed the distinctions between exempt and non-exempt employees can be.

The DOL’s proposed changes are still in proposal stage, although more than halfway through the 60-day public commenting period. However, it seems far more likely to go into effect than the more aggressive Obama-era regulations that were previously proposed.

Here are the top 5 things your business can do to prepare for the overtime change:     

1. Audit your business’s payroll records and identify which employees may be affected by the new rule.

The first step is simple — review your payroll records and figure out how many employees are paid less than the weekly or annual threshold.  Decide whether to apply raises or a time-tracking system for employees close to the threshold.

2. Review all job descriptions and duties to determine whether your business currently has any misclassified employees.

Even employees who make more than $35,308 annually might actually be non-exempt. This is your company’s opportunity to correct any employee classification issues before liability compounds.

 3. Implement a timekeeping system for all non-exempt employees and consider requiring that all employees track time.

Certain states already have across-the-board timekeeping requirements. Technology has simplified this task, but choosing the right technology is still a time-consuming effort.  Make sure you allot an appropriate amount of time for testing and implementation. And make sure employees certify their tracked time.

4. Update employee handbook or policies with an overtime policy that manages costs and reduces liability.

Your business has to pay overtime pay to any non-exempt employee who works more than 40 hours a week.  However, you can limit the financial risk by implementing a policy that requires supervisor approval before working any overtime hours.  Make sure you choose a policy that appropriately assesses financial considerations and employee workload.

5. Develop a roll-out plan consistent with your company culture.

In taking the above steps, it is important to be mindful about not only how the new rule may affect your business, but how it may affect employees’ perceptions of their roles within your organization.  Many employees may be disgruntled with the prospect of “clocking in and out.” Keep in mind that how you communicate the organizational change is just as critical as what you are communicating.

Like most regulatory changes, this one will likely be painful on the front end for many businesses. However, it could also end up being an opportunity to increase employee satisfaction and minimize risk. Many employers have been inadvertently violating the current FLSA overtime rules for years.  A thorough audit to address the new rule could prevent a class or collective FLSA action from being filed against your business.  It’s an indirect savings that can directly impact the sustainability of your business.

Tools to help

If you would like more information, the DOL notice on this proposal can be found online. There is even an FLSA Advisor Tool that can help clarify whether your employees are exempt. It is important to remember that FLSA is a federal law, and state laws may impose additional overtime requirements on employers. The government has made the issue of overtime a confusing maze with significant penalties for inadvertent missteps. The laws are constantly evolving and difficult for even the most sophisticated employers to monitor. Moreover, the penalties for error can be harsh.

If you have any doubt about whether your salaried employees may be entitled to overtime, this would be a good time to consult with an experienced employment lawyer. You can also contact your regional DOL Wage and Hour Division Office for guidance.

The proposal will almost certainly become law. Planning ahead will allow your business the time it needs to prepare for the roll-out and to be ready for whatever challenges come your way.

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