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Ten Steps Employers Can Take NOW to Prepare For The Final Overtime Rule


The Department of Labor's (DOL) proposed overtime regulations are one step closer to becoming a reality for the American workforce.

On March 14, 2016, the DOL submitted their final version of the regulations to the White House's Office of Management and Budget (OMB) for review, signifying the last step in the regulation becoming law.

Once the rule is finalized, an estimated five million "exempt" workers will become eligible for overtime. Employers need not wait to prepare for the impending changes. You can and should be proactive in evaluating the impact of the new rules, engaging your finance team with budgeting for the changes, and training management at all levels.

Wage and hour law

The Fair Labor Standards Act (FLSA), the federal wage law, requires employees to be paid at least the federal minimum wage and overtime for any time worked in excess of 40 hours in a workweek. In addition, the FLSA provides strict record-keeping requirements for employees to track their working hours.

Unlike federal anti-discrimination statutes, coverage under the FLSA is not dependent on the number of employees. The FLSA applies only to employers whose annual volume of sales or business total at least $500,000 OR businesses who are engaged in interstate commerce. In reality, the law covers nearly all workplaces. Courts have interpreted the term "interstate commerce" very broadly to include such activity as regularly using the U.S. mail to send or receive letters to and from other states, and placing or accepting interstate business call. Also, an individual employee can be covered under the FLSA if the employee engages in interstate commerce.

'Exemption' from overtime

Certain employees are "exempt" from the FLSA's minimum wage, overtime and record-keeping requirements. Exemption depends upon three things:

a) How An Employee Is Paid - Salary Basis

The employee must be paid on a "salaried basis," meaning the employee receives a fixed, guaranteed minimum amount for any workweek in which the employee performs any work.

b) How Much An Employee Is Paid - Salary Level/Threshold

The employee currently must be paid a minimum of $23,600 per year ($455 per week). There is also an exemption for "highly compensated employees" who earn $100,000 per year.

c) What Kind of Work Does the Employee Do - Job Duties Test

The employee must perform exempt job duties (referred to as Executive, Administrative and Professional duties under the regulations).

To qualify for exemption from overtime, all three of these tests must be satisfied. Paying salary alone is not enough.

The new proposed DOL overtime regulations increase the salary level (test b above) from $455/week ($23,660 annually) to $970/week ($50,440 annually). To maintain the exemption the employees will still need to be paid on a salary basis and meet the job duties test. The proposed changes, however, do not affect the exemption for Retail Employees Paid by Commissions. To qualify for that exemption three conditions must be met:

1. The employee must be employed by a retail or service establishment, and

2. the employee's regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and

3. more than half the employee's total earnings in a representative period must consist of commissions.

If the employee meets these qualifications, they are still exempt from overtime.

What Should We Do Now?

Every business sector is preparing for these changes, but the retail industry, in particular, is bracing itself. Wage and hour claims are old news for retail employers. The National Economic Research Associates, Inc. estimates that between January 2014 and March 2015, the retail industry accounted for 19% of all settlement dollars paid in wage-and-hour cases.

So what should you do now? Here are some initial steps you can take to get a handle on structural and budgetary impact of these changes:

1. Identify employees who will need to be reclassified, i.e. current employees who are exempt but paid less than $50,440.00 annually. Commissions and employer-provided benefits will not count toward the salary threshold.

2. Determine the number of hours these employees work. This seems simple but exempt employees are not required to track their hours and, therefore, employers may not be fully aware of the hours an exempt employee is working. You will also want to look at waiting time, meal and rest periods, training time, travel time, and other "hidden overtime."

3. Sit down with your finance folks. Calculate the feasibility and costs of raising pay of your currently exempt employees to the new threshold level vs. reclassifying employees as nonexempt and paying overtime vs. lowering pay to offset the overtime requirement. Projecting these costs now will assist you in deciding the course of action you want to take once the rule is final.

4. Identify how much time managerial employees are spending on particular tasks. Review job descriptions and tasks of impacted positions to determine if certain exempt tasks may be reassigned or maintained with the current position.

5. Consider how pay changes or other changes in job assignments may impact your organization. Will you need to make process or structural changes to accommodate, for example, exempt and nonexempt employees who will have the same job title? Will benefits need to be changed? Policies?

6. Develop administrative plans to ensure compliance when the regulations become official. Analyze whether any company policies - including policies that only apply to managers and pay policies - will be impacted and need to be changed. This means you will need to prepare and train all levels of management.

7. Negative employee morale is a big concern. Reclassifying managers and requiring them to track time will likely be met with resistance. It is important to have a unified message to employees on how and why changes are going to be implemented. It is also a good idea to have a plan for following-up with employees and monitoring their compliance with the new policies. The key message to employees should be that these changes should not result in a decrease in pay and are required by law.

8. Check your time-keeping methods and ensure they are sufficient for the additional employees who will now be required to use it. Accurate data collection will be an essential part of complying with the proposed FLSA overtime rule changes

9. Take this golden opportunity to address wage and hour issues without calling attention to them. Now is the time to determine if employees are properly classified as exempt, and make any needed corrections.

10. Lastly, and most importantly, don't hesitate to seek legal help to ensure compliance and help maneuver through the DOL regulations and classification changes. These rules are complex, and there are serious financial consequences if you are found to be in violation of them. The DOL's budget for FY2017 includes $277 million for wage and hour division enforcement, an increase of $50 million from FY2016. Once the rule is finalized, the DOL will send out its auditors to ensure employers are in compliance.

Hang on – it's going to be a busy season.

Dena H. Sokolow, a shareholder in the Tallahassee, Fla. office of Baker Donelson, brings more than 20 years of experience counseling and defending employers and
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