Last month, the Department of Labor passed new Overtime Rules that could have a far-reaching and major impact on American businesses, including law firms. But what does this really mean for employers, and what do you need to consider to remain compliant with the law?
What is the FLSA?*
In 1938, the FLSA (or Fair Labor Standards Act) was passed to establish minimum wage, overtime pay, recordkeeping and youth employment standards affecting full time and part time workers in the private sector and in federal, state and local governments.
Nonexempt or hourly workers must be paid overtime pay at a rate of not less than one and one-half times their regular rates of pay after 40 hours of work in a workweek. The FLSA does contain some exemptions from these basic standards. Some apply to specific types of businesses; others apply to specific kinds of work.
There are two specific criteria that must be met for determining exemption status, or whether a job is hourly or salaried. One is the Minimum Salary test and the other is the Duties test.
New Overtime Rules
Since 2004, the minimum amount for the salary test was $455/week or $23,660/year. Note that this amount is below the poverty level for a family of four. No changes or increases to this minimum salary test were made for the past 12 years.
In May 2016, the US Department of Labor announced the final regulations revising the current Overtime Rules. The new regulations:
- Raise the salary threshold indicating eligibility from $455/week ($23,660 per year) to $913/week ($47,476 per year)
- Automatically update the salary threshold every three years beginning January 1, 2020, based on wage growth over time, increasing predictability
- Allow bonuses paid on at least a quarterly basis to count towards the minimum salary threshold up to 10% of the minimum salary level
This final rule is effective December 1, 2016, giving companies most of the year to implement changes.
Other provisions of the new regulations are:
- The final rule does not make any changes to the current Department of Labor duties test for executive, administrative and professional positions.
- Company size doesn’t matter and all employers must comply with the FLSA to include the minimum salary and overtime provisions.
- There are some provisions based on the type of work that may not require the minimum amount for the salary test.
- Geographic differentials will not be a factor.
Considerations
Needless to say, many companies will need to make some big changes in the next several months to ensure compliance with these laws, and how they communicate these changes to their employees will be critical.
In many organizations, there’s a perception that a change from an hourly or non-exempt position to an exempt or salaried position equals a promotion. Therefore, a change from an exempt or salaried job to a non-exempt or hourly job due to these new regulations may be considered a demotion. Most companies will need to make adjustments with these cultural considerations in mind.
Also, even if the minimum salary test is met, the duties test must also be met. This provides a good opportunity for companies to now review their current job descriptions and determine if they truly reflect the primary duties of their current positions.
Companies may need to consider completing a time-study of workers impacted by this new legislation to determine the appropriate course of action to take.
There are a number of factors that companies will need to consider as they move forward with implementing any necessary changes, and the consequences of not doing so are significant. Employers that improperly classify employees as exempt are normally required to reimburse employees for their lost income, and they may also be subject to civil and criminal prosecution and fines from $1,000 – $10,000 per violation.
Speaking with an HR consultant or professional is highly recommended to all organizations who anticipate changes, and you can contact MCM’s HR Consulting Team for more information by clicking here.
*Source: US Department of Labor
Tiffany Cardwell is a Principal Consultant on MCM’s HR Advisory Services team. Her expertise lies in over twenty years of experience in domestic and international human resources. She has expertise in acquisitions, change management, engagement, leadership coaching and development, performance management, compensation and total rewards, talent acquisition and workforce planning.
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American Academy of Estate Planning Attorneys, Inc.
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