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New Federal Overtime Rules Take Effect December 1, 2016
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This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

BY AMY ROBINSON

This article originally appeared in the July 15th, 2016, edition of the Vancouver Business Journal

Last July, the U.S. Department of Labor (“DOL”) rolled out proposed changes to the overtime rules under the Fair Labor Standards Act (“FLSA”), the federal law that mandates minimum wage and overtime pay for certain workers who are not otherwise exempt.  After evaluating thousands of comments the DOL received from employers, unions, and other interested parties, and making some additional adjustments, the new rules have now been finalized and are scheduled to go into effect on December 1 of this year.  As a result, the DOL estimates that approximately 76,000 workers in Washington, and more than 4.2 million nationwide, will now become eligible for overtime pay. Businesses now have just a few months to prepare to comply with this significant change in wage and hour law.

What are the big changes? (also known as: What’s all the fuss about?)

Recall that, among other things, the FLSA mandates that covered workers receive overtime pay equal to at least one and one half times the regular hourly rate for all hours worked over 40 in a single workweek, unless the position or the particular enterprise qualifies as exempt from the overtime mandate.  The most common exemptions require the position to meet a three-part test: (1) it must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) it must require duties that are primarily executive, administrative, professional, outside sales, or computer related, as more specifically spelled out by a myriad of regulations and administrative rulings (known as the “duties test”). 

The new rules do not alter the salary basis or duties tests but do make significant changes to the salary level test, which has been set at $455 per week since 2004.  Now, the salary level is set at $913 per week or $47,476 annually for a full-year worker.  The salary level will also now be updated every three years to reflect the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region in the U.S.

In addition, the new rules tie the highly compensated employee (“HCE”) exemption, which allows for a more abbreviated duties test, to the 90th percentile of weekly earnings of all salaried employees nationally.  When the rules go into effect, the salary level amount required for HCEs will increase from $100,000 to $134,004, annually.

Finally, for the first time, the new rules now permit employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary amount. 

So, what do employers need to do now? (aka: What should I do instead of panic?)

Employers covered by the federal overtime rules (which is just about any business with employees, with rare exceptions) should familiarize themselves with these changes and evaluate its impact on their operations now to ensure compliance by December 1, 2016.  This means making sure all salaried positions otherwise qualify as exempt and are paid a salary of at least $913/week.  Again, provided bonuses, commissions, or other incentive pay received by the employee is truly nondiscretionary, up to 10 percent of those amounts may now be included in that calculation to ensure the salary level test is met.

A note of caution:  However well intended the decision may be, simply designating a position as “salaried” does not automatically exempt it from overtime.  This is a mistake that can and likely will have serious legal and financial consequences to the business.  These new rules present a renewed opportunity to review existing classifications to ensure compliance with applicable wage and hour laws.  
 
If after proper analysis it appears the position will no longer qualify as exempt, it is important to make the adjustments necessary to fully comply with FLSA.  Typically that will include (a) maintaining a record of the day and time the work week began as well as the actual hours worked each day by the now non-exempt employee, often via daily or weekly timesheets/timecards submitted by the employee, and (b) ensuring the employee is properly paid for all overtime (i.e. every hour over 40) worked within a single workweek.  

For businesses dealing with positions that have become non-exempt as a result of this change in the law, there are additional tools to minimize the obvious risks and avoid potentially unnecessary costs that should be explored now.  For example, in addition to other scheduling adjustments and controls, adopting a written overtime policy can help ensure that employees clearly understand if and when prior approval may be needed, and how to obtain it, before inadvertently working any overtime.  Although a lack of required approval will not excuse the employer’s obligation to pay overtime when worked, a properly crafted and appropriately applied policy can provide for better communication, planning, and, ultimately, cost control. 

Amy Robinson, JD, SHRM-SCP, SPHR, is an attorney in Jordan Ramis PC’s employment law practice group.  Prior to practicing law, Amy served as a human resources professional, giving her valuable insight into employment issues.  You can call Amy at (360) 567-3900.