Effective December 1, 2016, employers must be in compliance with the U.S. Department of Labor’s (DOL) much anticipated Final Rule that substantially revises the federal overtime pay regulations. The Final Rule, which was published in the May 23 edition of the Federal Register, amends the Fair Labor Standards Act (FLSA) regulations that implement the exemption from minimum wage and overtime pay for executive, administrative, and professional employees (the EAP exemption).
Building service contractors (BSCs) should note that the Final Rule substantially raises the minimum salary level requirement for the EAP exemption to US$913 a week (or $47,476 annually).
The FLSA requires that employers pay employees a premium overtime rate of 1.5 times their regular rate for all hours worked over 40 in a work week—on top of paying a minimum wage—unless the employees are classified as exempt from these requirements. The EAP regulations, which were last updated in 2004, set forth tests for exemption from these requirements.
Under existing law, for an employee to qualify for the EAP exemption, they must pass three tests:
- Salary Basis Test. The employee 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 Level Test. The amount of salary paid must meet a minimum specified amount, currently set at $455 per week (or $23,660 annually).
- Duties Test. The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).
On March 13, 2014, President Barack Obama directed the DOL “to modernize and streamline the existing overtime regulations.” On July 6, 2015, the DOL published a notice of proposed rulemaking (NPRM) setting forth its proposed revisions to the overtime regulations.
In response, the DOL received more than 270,000 public comments, many of which deemed the proposed salary level as too high; expressed concern that the rule failed to take into account regional wage differences; and it failed to recognize the adverse impact these increased personnel costs would have, especially on small businesses.
In the end, the Final Rule incorporated changes responsive to some of the public comments, including:
- Effective December 1, 2016, the minimum salary required for the EAP exemption increases to $913 a week or $47,476 annually, rather than the originally proposed $50,440 per year.
- Minimum salary and compensation thresholds will automatically update every three years beginning January 1, 2020.
- Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid at least quarterly to satisfy up to 10 percent of the salary level for the EAP exemption.
- The Final Rule makes no changes to the duties tests for the exemptions.
- The Final Rule adds provisions clarifying that, as long as an exempt employee’s pay includes a guarantee of at least the minimum weekly required amount, that employee’s compensation may be computed on an hourly, daily, shift, or fee basis.
Next Steps for Employers
The Final Rule significantly revises how employers classify and pay their employees. Therefore, it is critical that employers begin planning now for the changes to the overtime regulations that will become effective in a matter of weeks. Failure to comply can result in substantial penalties for employers, including fines of up to $1,100 per violation for repeat offenders.
The following suggestions can help you prepare for the changes that lie ahead:
- Identify employees likely to be affected and assess the impact. Identify those exempt employees who will be converted to overtime-eligible under the Final Rule, and start tracking their hours. For BSCs, this will include any employees (including cleaning workers) who have managerial responsibilities and make more than the current salary threshold. For each such employee, identify the number and frequency of overtime hours worked, and the reasons for that overtime. Obtaining this information will enable employers to make informed decisions about whether and how to absorb the new overtime costs.
- Adjust salaries to maintain exemptions or account for overtime. For employees whose salaries are close to the new threshold and who meet the duties test, employers may choose to raise their salaries to meet the new applicable threshold and maintain their exempt status.
- Offload delegable work tasks to part-time employees. Employers may wish to consider bringing in additional part-time workers to take on tasks that a single hard-working employee now handles.
- Expect exempt employees to shoulder more of the burden. Be careful, however, not to load too many non-exempt tasks onto exempt employees to avoid diluting the exempt nature of their primary duties.
- Trim activities that count as working hours, but don’t add value. Because of the overtime pay implications, employers may not be able to maintain some activities that count as compensable working hours for non-exempt employees.
- Consider shifting the standard work week if weekend events produce substantial overtime. Because overtime pay is calculated on a workweek basis, weekend events can produce significant overtime hours. If employers adopt a Wednesday – Tuesday workweek, however, employers can give employees time off on Monday or Tuesday to offset those extra weekend work hours.
- Build into customer contracts provisions that tie the cost of the contract to changing labor costs. Because the Final Rule calls for increases every three years, some contractors should consider including provisions in new contracts, and seeking amendments to existing contracts that adjust the total payment to account for the personnel budget increases the employer will incur.
The DOL provides a wealth of resources to help employers better understand, plan, and otherwise prepare for the changes to the overtime regulations at www.dol.gov/whd/overtime/final2016.
Editor's note: A similar version of this article ran in the August 2016 edition of ISSA Today. Visit issa.com/magazine to read the complete article.