Compliance Strategies for Proposed Overtime Rule

In July of 2015, the U.S. Department of Labor (DOL) issued a proposed rule that would significantly change how eligibility for overtime wages is determined.

The biggest change? The proposed rule would more than double the salary threshold employees are required to meet in order to be considered exempt for overtime pay under the white collar exemptions of the Fair Labor Standards Act (FLSA). (The current threshold is $26,669/year – the proposed rule would raise that threshold to $50,440/year.)

Other changes include raising the highly compensated employee annual compensation and implementing a mechanism that would automatically update the salary and compensation thresholds on an annual basis.

The DOL's estimated timeline for this proposed rule going into effect is sometime in July, although as of now it's still unclear if that targeted date will actually be when the DOL releases the final rule.

Why is this proposed rule so significant?

If the new rule is implemented as-is, as many as five million previously exempt workers (workers currently making less than $50,440) would become newly eligible for overtime pay. The rule would also make overtime compensation eligibility rules more clear for another six million workers.

The White House estimates that complying with the new rule will cost employers between $239 and $255 million per year, but those in the business community say that the cost to employers is likely to be much higher. (Oxford Economics, for example, estimated that the annualized employer costs could be as much as $874 million in administrative expenditures alone.)

The implications of the proposed rule are widespread, affecting employers across all industries and employees of all levels. In many employees’ minds, for instance, being considered “exempt” is seen as a rite of passage or reward. If these employees suddenly have to go back to punching a clock every day, they may think of it as a demotion of sorts. And what about all those thousands of hours employers will have to start tracking if the proposed rule is adopted? Employers who don’t have a time and attendance system that’s capable of effectively tracking regular versus overtime hours may need to seriously think about investing in one.

Employer strategies for compliance

Below are a few strategies employers might take to comply with the proposed rule if it goes into effect.

• Make no changes. Employers could simply continue on as they have done, without making any changes to employee hours or salaries, and just pay newly eligible employees overtime. This strategy would work best for an employer whose employees very rarely work more than 40 hours a week, or one whose employees all meet the new requirements to be considered exempt. For most businesses, however, this wouldn’t be fiscally possible.
• Raise employees’ wages to be above the salary threshold. This is another straight-forward but unlikely approach. (In fact, the DOL estimates that just 0.06 percent of workers would receive a salary increase as a result of the new rule.)
• Cut employees’ base pay. This strategy is certain to be one of the least popular among employees, but would allow employers to have their employees work the same number of hours for the same amount of pay. Employees in this scenario would have to work extra hours in order to maintain their previous income, however.
• Cut employees’ hours or institute stricter overtime policies. These strategies would allow employers to minimize the number of overtime hours their employees work, but are not air-tight. Employers that refuse to pay overtime wages just because the time was not previously approved may find themselves in hot water later on.
• Cut back on benefits or other “perks.” This is another strategy that is likely to be unpopular among employees. Furthermore, an employer who chooses to cut back on health care coverage may also trigger Affordable Care Act penalties.

Consequences of noncompliance

While none of the strategies outlined above may sound appealing, they are, indeed, much better than the alternative consequences of being found to be out of compliance with the FLSA’s overtime regulations, which include potential lawsuits, fines, having to pay back-wages and even imprisonment.

Conclusion

Although the DOL doesn't plan to publish the final rule until at least July, employers would be well advised to start thinking about what strategies they would be most likely to when the updated rules as quickly as possible after they go into effect, since they may not have a lot of time to do so after the release date. Experts are estimating that the window within which employers will be required to comply with any changes will likely be very short, possibly just 60 days.

This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.