Starting December 1, new overtime rules kick in that will make millions more employees qualify for overtime pay. The changes include a dramatically higher pay threshold that determines whether workers are eligible for overtime at a rate of at least one and one-half times their regular pay. With a few months of lead time, employers need to take a look at their operations and decide how to incorporate the changes. This article explains.

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New Overtime
Rules Issued
What it Means
for You

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A change in the rules governing overtime has been coming for two years,
with a sneak preview of proposed modifications last year. But on May 18, the
Department of Labor (DOL) came out with its new final rules, which take
effect on December 1, 2016. The rules will significantly raise the salary level
used to determine whether employees are eligible for overtime and will affect
more than 4 million salaried employees, according to the DOL.
The Obama administration's goal was to reset the income threshold to the
point it would have reached, with period inflation adjustments, had it not
been frozen more than a decade ago.
Under the new rule, the wage threshold test is more than doubling from
today's $23,660 ($455 per week) to $47,476 ($913 per week). The limit will be
adjusted every three years beginning January 1, 2020. Employees earning less
than $47,476, regardless of their job responsibilities, are deemed non-
exempt, and therefore entitled to overtime pay.

3. Opposition to the Final Rules
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Many organizations reacted negatively to the new overtime rules. Here are
excerpts from statements issued by 4 groups:
National Restaurant Association:"Restaurants operate on thin margins with
low profits per employee and little room to absorb added costs. More than
doubling the current minimum salary threshold for exempt employees, while
automatically increasing salary levels, will harm restaurants and the employer
community at large.

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"More than 80% of restaurant owners and 97% of restaurant managers start
their careers in nonmanagerial positions and move up with performance-
based incentives. These regulations may mean that salaried employees, who
have worked hard to get where they are, could be subject to becoming hourly
employees again.“
American Council on Education: "…Requiring such a dramatic and costly
change to be implemented so quickly will leave many colleges with no choice
but to respond to this regulation with a combination of tuition increases,
service reductions and possibly layoffs.“
National Retail Federation: "In the retail sector alone, hundreds of thousands
of career professionals will lose their status as salaried employees and find
themselves reclassified as hourly workers, depriving them of the workplace
flexibility and other benefits they so highly value."

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National Association of Manufacturers:"Manufacturing is a pathway to the
middle class for millions of men and women who make things in America.
However, this regulation creates barriers to opportunity, severely limiting
flexibility and dramatically increasing red tape, especially for small
manufacturers who cannot afford the burdens of a 99% salary increase for
management employees who are exempt from overtime pay. Even worse, the
administration has also required there to be future automatic increases,
which creates uncertainty in planning in future years.“
In addition to business and not-for-profit organizations, some Republican
members of Congress also oppose the new rules and say they will try to block
them.

6. Exempt or Non-exempt?
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Unless specifically exempted, employees covered by the Fair Labor Standards
Act must receive pay for hours worked in excess of 40 in a workweek at a rate
of not less than one and one-half of their regular rates of pay. Not only will
employers have to pay the overtime, they'll also be liable for payroll taxes on
it.

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Two tests determine whether employees should be treated as "exempt," and
thus not entitled to overtime pay:
• A pay threshold test, and
•A duties test, under which employees who "primarily perform executive,
administrative, or professional duties," are deemed exempt. Regulations spell
out those criteria in greater detail.

8. Highly Compensated Threshold
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In a related change, the pay threshold for "highly compensated" also went up — from
$100,000 to $134,004. Employees earning above that higher amount, regardless of
whether their jobs would be classified as non-exempt under the "duties" test, can still
be treated as exempt, and thus not entitled to overtime pay.
So, beginning in December, whether employees whose pay falls between
$47,476 and $134,004 are to be eligible for overtime pay as non-exempt
workers will be determined by the same duties test that has been in place for
years.
Note: Employees' pay for purposes of determining their exempt/non-exempt
status includes nondiscretionary bonuses, incentive pay and commissions, as
long as those payments occur at least on a quarterly basis and don't exceed
10% of the employee's compensation.

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Salaried employees who, thanks to the soon-to-be higher income threshold
will be entitled to overtime pay, don't need to be switched to being paid an
hourly wage or to punch a time clock. However, for salaried non-exempt
employees below the threshold, it's important to track time worked to ensure
that the hours:
a) Don't exceed 40 hours a week, or
b) That employees are awarded the overtime pay they have earned.
Overtime pay will need to be determined based on calculating what the
employee's salary translates to on an hourly basis for a 40-hour workweek.

10. Impact Assessment
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Here are some immediate steps to consider in response to the new rules.
Start by answering these questions:
• How many of your employees will be newly classified as non-exempt?
• How many of them routinely work more than 40 hours a week?
• What would it cost you if they continue to work more than 40 hours per
workweek and are eligible for overtime?
• What systems do you need to put in place to monitor employees' hours
carefully after the new rules go into effect? The DOL says employers "may
use any method they choose for tracking and recording hours" as long as
it's complete and accurate.

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Once you get a basic handle on this information, you'll face more questions.
Suppose, for example, that you don't implement any changes and your payroll
costs go up by more than you can manage. You would then need to address
questions like these:
• What if we hire some part-time people to keep newly non-exempt
employees from having to exceed 40 hours a week?
• Will it be more economical to give raises to employees who are currently
earning somewhat less than $47,476, to get them to the exempt level and
avoid having to track their hours and pay them overtime?
• Can we reduce or eliminate overtime hours?
• Can we lower the salaries or wages of employees who will become
entitled to overtime pay so that, when they earn overtime pay, they will
wind up earning the same amount as they did before?
• Can we make adjustments to our employee benefits program to offset the
rise in payroll cost?

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There are no easy answers. Each possible response raises its own issues. For
example, if you're currently paying for all or a portion of employee benefits
such as group life and long-term care insurance, you could shift those over to
"voluntary" (employee-paid) status. But doing so would certainly be a
takeaway, and many employees would resent it — although perhaps not as
much as an actual wage reduction.

13. No Free Lunch
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Another way you could blunt the impact of cutting pay or benefits is to
increase non-exempt employees' vacation benefits. However, there's no "free
lunch." Doing this could increase the total hours that non-vacationing
employees would need to work to cover for their vacationing colleagues,
thereby driving up overtime pay.
Any such adjustments would need to be considered in light of the overall
competitiveness of your labor market and your total compensation package.
Although other employers in your area will probably be facing the same
pressures, losing valued employees might cost you more than having to pay
some overtime.

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Suppose you raise the pay of employees who are near the threshold and
routinely work more than 40 hours a week, to keep them in the exempt
category. That solves the overtime problem but could have negative ripple
effects. For example, one issue is "pay compression," or the narrowing of the
spread in pay between high and average performers, veteran employees and
new hires, or employees and their supervisors. Some resentment is inevitable.
That, in turn, could put pressure on you to give raises to employees already
above the exempt threshold. That might be necessary as a way to restore the
original spread and make things "fair" in the eyes of the higher paid workers.
This assumes they will become aware of pay changes occurring among their
colleagues. While that's not often the case, it's a safe bet that many will figure
it out.

15. "Can We Talk?"
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It's also a safe bet that your employees will have heard about the impending
rule change, and they'll be looking to you for answers about how it will affect
them. For most employers it's probably wise to begin engaging employees on
the topic, even if you haven't mapped out the details of how you will respond.
An honest "we're figuring this out" answer can be better than silence.
For more information on the final rules, consult with your payroll or tax
adviser.

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