DOL’s new overtime rules – and the next moves for HR

A few days before the Fourth of July holiday, the DOL unveiled the highly anticipated proposed changes to the FLSA overtime exemption rules — changes that will impact employers of all stripes. Now the real work begins for HR pros.

First, it’s important for employers to remember the proposed rules are the first step in the rulemaking process.

After the proposed rules are published in the Federal Register, there’s still a comment period, a review of the comments where the DOL makes necessary changes, and a release of the final rule and effective date.

So when can HR pros expect the new OT rules to actually kick in? Answer: 2016.

HR Benefits Alert recently attended former administrator of the DOL’s Wage-and-Hour Division (WHD) Tammy McCutchen’s presentation at the 2015 SHRM annual conference in Las Vegas. The session was titled “Working on Overtime: What Will New FLSA Rules Mean for Employers” and, during her presentation, McCutchen confidently predicted the new rules would take effect in 2016.

And McCutchen should know how long the rulemaking process takes. During her tenure at the DOL, she was responsible for creating and implementing the most recent changes to the overtime regs.

In terms of the proposed regs, the DOL’s Notice of Proposed Rulemaking on the OT changes clocked in at 295 pages. Here’s a breakdown of the proposed changes — as well as some basic strategies firms are considering as a result of these changes:

The $50,400 threshold

The new minimum salary. There was no question the feds were going to raise the minimum salary threshold when it introduced its changes, but the new limit is much higher than many experts were expecting.

Under the current FLSA regs, the minimum salary a worker must be paid to be exempt from overtime is $455 per week or $23,660 per year. Now, under the proposed regs, that amount would jump to $970 per week or $50,440 per year.

How did the DOL come to that specific amount? The agency calculated the new minimum salary would equal the 40th percentile of weekly for full-time salaried workers.

Automatic salary threshold increases. The proposed regs also would tie salary thresholds to an automatic-escalator for the first time ever. The feds have proposed using one of the following two methods to automatically bump up the thresholds:

  • keeping the thresholds tied to the 40th and 90th percentile of earnings, or
  • adjusting the amounts based on changes in inflation by tying them to the Consumer Price Index.

The highly compensated employee threshold. The new regs would also bump up the highly compensated employee threshold — from $100,000 to $122,148. The new amount is the 90th percentile of workers’ weekly earnings.

Bonuses. The proposed regs will not tie discretionary bonuses toward a person’s salary. Under the current regs, these bonuses are only included when calculating the total compensation under the highly compensated employee test. However, like all of provisions in the proposed reg stage, this could change because of the comments the DOL receives.

What about the duties test?

Based on the DOL’s previous comments, many HR pros were expecting some changes to the duties tests for executive, administrative, professional or outside sale exemptions. But no changes were mentioned in the proposed regs.

Many experts — including McCutchen — expected to see the DOL adopt a California-style reg that required employees to spend more than 50% of their time on exempt tasks to be OT-exempt. Although the DOL didn’t specify any changes to the tests, it did say it’s seeking comments on whether these duties tests should be changed. Plus, at the 2015 SHRM conference, a number of presenters speculated that they wouldn’t be surprised if changes to the duties tests were included with the final regs.

Who’s impacted, how you can cope

The big question now is: How many employees will be affected by the proposed rule changes? The DOL says a staggering 11 million employees will be impacted by this move.

During her presentation, McCutchen touched on several strategies employers can use to deal with the new OT regs, which included:

  • Increasing workers’ wages. If they wish to avoid compliance issues altogether, employers can simply increase affected workers’ salaries to meet the new $50,440 minimum. Of course, when McCutchen asked how many HR pros planned on going this route, virtually zero hands shot up.
  • Using OT to create a comparable salary. Another option McCutchen mentioned was projecting the amount of overtime you’d expect workers to put in. Then, negotiate a lower salary for formerly exempt staffers and use the overtime hours to bring them to a comparable total pay.
  • Reclassifying staff. Of course, employers can simply reclassify workers as non-exempt to comply with the new overtime requirements. On the surface, this may seem like the most convenient option, but McCutchen warned employers about several potential difficulties. Examples: Training workers who never had to worry about timekeeping on the importance of accurately recording their hours worked, revisiting the effectiveness of your company’s timekeeping system, etc.