Seven Issues You Need to Deal With, Right Now, Before the New DOL Overtime Rules Take Effect
Michael G. Trachtman
Powell Trachtman Logan Carrle & Lombardo, P.C.
MEA General Counsel
This is not an overstatement: after much anticipation, the Obama administration has officially announced new regulations that it will implement a drastic and, for many businesses, a budget-busting change to the rules that govern which employees must be paid overtime. The new regulations go into effect on December 1, 2016, and they will be aggressively enforced by the Department of Labor. Many businesses will need at least 6 months, and probably more, to implement these fundamental alterations to their compensation structures.
Here is the upshot of the new regulations, in a nutshell: unless an exempt employee makes at least $47,476 annually, that employee will be non-exempt – that is, the employee you have always considered to be a part of management, the employee who is expected to get the job done no matter how long it takes, will have to keep time records, and will be entitled to overtime. In what many respected analysts believe to be a disturbing understatement, the DOL estimates that this change will require employers to pay $1.4 billion in additional compensation to employees who are currently exempt, but will now become non-exempt with the stroke of a pen.
Most employers knew that this change was coming – we dealt with it a few months ago in this column, MEA recently sent out a Legal Alert, and the national media has been on the case for some time. But, at least in my experience, many employers have not fully considered, in a sufficiently detailed and nuanced way, how they will deal with this new reality, and they will pay a steep price for their lack of planning.
With than in mind, here are seven issues that you need to seriously confront, now, along with your professional advisors, before it’s too late.
1. Before you do anything else, identify the positions and employees that may be affected.
Most companies do not track the number hours worked by exempt employees. As a result, you may not know which of your exempt employees typically work more than 40 hours per week – only those employees will be materially affected by the new regulations. You should list the exempt employees who make under $47,476 per year, and do what you need to do in order to determine if those employees typically work more than 40 hours per week, including hours worked at home. You won’t know where to direct your efforts until that has been done.
2. Should you increase salaries so they exceed the threshold?
One option will be to bump the salaries of currently exempt employees over the new threshold in order to maintain their exempt status.
Consider an exempt employee who makes $38,000 and typically works 50 hours per week. Will you bump her salary to $47,477 so she remains exempt? If so, will you eat the extra cost? Or will you recoup the extra cost by reducing company-paid benefits, commissions, bonuses or other incentives? And if you try to recoup the extra cost, how will that affect morale and productivity when the employee realizes that the raise was really no raise at all, and in the process she lost the opportunity to earn ten hours of overtime per week?
Or, picture an employee who makes $45,000 and typically works 50 hours a week. The employee is pleased, knowing that because of the new regulations, he will now be paid a good amount of overtime each week and his income will increase. Then you raise his salary by $2,500 – much less than the overtime he would have earned if he did not receive a raise. How will you deal with the resentment your end run around the regulations will likely generate?
3. Should you ban overtime for exempt employees who are converted to non-exempt status?
That’s an option, but if those employees typically work overtime, how will you get the work done if they do not put in the same hours? You could fill in with part-timers. You could redistribute work to other exempt employees. Maybe that works, maybe it doesn’t – again, there may be morale, productivity and efficiency issues — but you will need to start that analysis now.
And what about the go-getters in the company – often, the “millennials” who want to work extra hours, not for the immediate compensation, but to prove their long term value in the hope of advancing through the company ranks. If they are non-exempt, you must pay them overtime as it is earned, even if they tell you they don’t want the extra money. Are you going to prohibit their hard work?
4. Should you terminate the exempt employees who have been converted to non-exempt status, and replace them with a lesser number of higher paid exempt employees?
That’s another option, with the same morale, efficiency and productivity issues. Start thinking about how viable that kind of restructuring will be.
5. Working from home and off the clock hours will be a major issue.
The federal and state departments of labor are all over employers who do not pay non-exempt employees for the time spent answering emails and doing other work at home. For many exempt employees, catching up during off-hours is second nature, but when they are converted to non-exempt status, you must pay them for those hours even if they put in the time against your orders (you can discipline them, but you still must pay them). Maybe you think the DOL will never find out. You might be right – until one, disgruntled employee makes a phone call. The DOL has vowed to make the cost of non-compliance onerous enough to remove the temptation.
6. Should you replace the non-exempt employees with independent contractors?
If only it were that easy… The DOL has declared that most independent contractors are, really, employees, and tens of millions of dollars is being spent to find and punish employers who misclassify employees in this way – avoiding overtime, FICA, FMLA and other obligations in the process. If it looks, walks and talks like an employee, it’s probably an employee. Get counsel before trying the independent contractor gambit.
7. There is silver lining – well, sort of.
We often deal with clients who have, for years, misclassified non-exempt employees as exempt employees. They are between a rock and a hard, illegal place: if they reclassify the employees as non-exempt, they run the risk that the employees will realize that they have been cheated out of overtime and that the employees will blow the whistle; if they don’t reclassify the employees, the problem just keeps getting bigger and scarier.
The new regulations may provide some cover – many employers will be in the midst of reclassifying employees because of the regulations, and it will be easier to reclassify other employees during this process, without raising suspicions. To prepare for this opportunity, employers who think they may have some misclassified employees should take steps to ferret out the potential violations now, before it’s too late.
Let us know if we can help.
Michael G. Trachtman is MEA’s general counsel and the President of Powell Trachtman Logan Carrle & Lombardo P.C., a 30+ attorney King of Prussia-based law firm that has represented businesses and business people for over twenty-five years. He can be contacted at email@example.com. See www.powelltrachtman.com for more information.