The New Overtime Rule – What You Need to Know

June 21, 2016

Working Hours and Overtime Calculation in Saudi ArabiaThe Department of Labor has made it official: Companies are going to have to start paying overtime to millions of currently salaried workers effective December 1 of this year. The new rule will directly affect about 4.2 million employees not currently eligible to earn overtime pay who will now be able to qualify, unless their employer takes some other action. You can read the full text of the new rule here.

Fun Fact #1: The Department of Labor estimates that it will take each of the 7.4 million establishments affected one hour to become familiar with the new overtime rule.

Fun Fact #2: It’s 508 pages long.

There are going to be some teething problems, to be sure, – and more than a little weeping, wailing and gnashing of teeth. But it’s also an opportunity for a sharp HR worker or department to add some value for the boss, and further justify your existence.

First, the basics:

Under the new rules, employers must pay overtime to any worker with a salary of $47,476 per year. That’s more than double the current threshold of $23,660 per year. This will affect salaried employees even if the employee is classified as a manager or professional.

The Department of Labor will increase the threshold every three years.

The new rule also increases the total annual amount that highly compensated employees must earn to qualify for the exemption to $122,148 from $100,000,

Senior managers are going to be looking to HR professionals to become subject matter experts on the new rule, in order to help them guide mid-level and junior managers into compliance with the new rules.

In some cases, companies and departments are going to have to make substantial changes in how they do business. For example:

  • Workers may not be able to take work home.
  • Catching up on weekends may no longer be an option, unless paid.
  • Working through lunch may be a thing of the past, regardless of what workers want to do.
  • Workers and managers will need to track time spent on activities outside of the office.
  • Rules regarding making and taking work-related phone calls at home will have to be considered.
  • Many salaried employees will have to cease checking work email accounts after hours.
  • Results-only job evaluations and work-arrangements may have to be revised

In addition, managers will have to deal with hurt feelings among people who worked hard to attain salaried positions who are all of a sudden told they need to punch a clock again.

As an HR professional and advisor to your senior management, you need to be able to suggest solutions and help management implement successful policies that are compliant with the new overtime rules. Here are some suggestions.

  • Put together an overtime rule compliance plan. This is going to include newsletter and information bulletins to managers and staff. Exempt and non-exempt employees may require different messages. Have a plan and start rolling it out now.
  • Provide management with a spreadsheet of people who are newly affected by the new rule. There’s no need to publish salary information or risk it being disclosed to people you don’t want seeing it. You can do this simply by putting together a list of employee names and a classification of “exempt” or “non-exempt,” according to their salary level and job duties/description.
  • Raise salaries. Under the new rule, it doesn’t make as much sense to have salaried employees making less than the overtime pay threshold of $47,476 per year. Ultimately, that translates to a weekly salary of $913 per week. If you have employees making just under that number now, it may make sense just to give them a raise and not have to worry about overtime pay and compliance costs for those individuals.
  • Tell managers they can’t hide behind email anymore. This sounds like a funny thing to say, but it’s important: Under the new rules, communicating with non-exempt employees via email becomes very dangerous. Employees who check email at home or who receive alerts or emails on their phones will technically have to log the time and potentially qualify for overtime. Once managers cease relying on emails for after-hours communications to staff, it will be much easier to implement an email curfew, if necessary.

Speaking of which…

  • Impose an email curfew. This is a policy that restricts non-emergency emails to business hours or shift hours only. This policy is going to have to have teeth, though. For example, you may have to instruct workers not to download emails on personal devices.
  • Take the opportunity to do some classification housekeeping. You may have employees who have technically been misclassified for a long time. But you’ve resisted reclassifying them as non-exempt in order to avoid a hurt ego, or potentially raise compliance flags with state and federal labor law enforcement agencies. But now that the new law is in place, thousands of employers across the country will be reclassifying employees wholesale. This is your chance to take care of business, classifying employees while you have some legal top cover, and you can do so without raising any red flags. Blame it all on the government. This time, you’d be right, and you can do it without necessarily providing a de facto admission that the employee was misclassified all along.
  • Pay out annual and semi-annual bonuses and commissions more frequently. Why? Because as long as a bonus or commission payment to a non-highly-compensated employee is paid at least quarterly, you can count up to 10 percent of it towards their salaries for the purpose of complying with the new federal overtime rule. Note: For highly-compensated employees, however, you can still count the total compensation, including bonuses and commissions, towards the salary threshold.
  • Recommend making some discretionary bonuses non-discretionary. This will help make them countable against the salary threshold.
  • Remind employers that the new rule does not affect certain retail sales professionals who are paid commissions. This is true as long as at least half of the employee’s total earnings are paid as commissions, the employee’s regular rate of pay is 1 ½ times the minimum wage for every hour worked in a week in which the worker actually worked, and the employee is employed by a retail or service business. Important note: Tips don’t count as commissions for this purpose.
  • Convert up to $5,525 of direct tuition assistance, currently non-taxable to the employee, to student loan repayment assistance, or to a cash payment.  This can help close the gap between current pay and the salary threshold, and save a lot of overtime down the road. The employee will have a higher tax burden, but employers can “plus up” the amount to compensate if desired.
  • Expect some grumbling. It could be that some workers will receive salary increases to bring them up to the threshold, while others don’t get raises, but will just be reclassified as hourly employees. Workers will be exquisitely sensitive to perceived unfairness.
  • Consolidate more responsibilities with exempt workers.
  • Classify more workers as “computer professionals,” if possible. There is no change under the new rules for computer professionals who earn at least $27.63 per hour.
  • Increase independent contractors to take up some of the slack. You may be able to hire outside contractors for less than the time and a half it would take to pay one of your own employees, once that employee goes over 40 hours per week.