FLSA Overtime Rule Change

Matt BauerHuman Resources

On March 14th, the new Final Regulations on the Fair Labor Standards Act were sent to the Office of Management and Budget for final review.  The proposed U.S. Department of Labor (DOL) changes to the “white-collar exemption” in the Fair Labor Standards Act (FLSA) could make more than 5 million individuals eligible for overtime pay—individuals who currently aren’t eligible. This could have a significant impact on employers who may face increased labor costs and compliance efforts.

To qualify for the white-collar exemption, an employee must satisfy a variety of tests, including a duties test, a salary basis test and a salary level test. Currently, under the salary level test, only white-collar workers making less than $23,660 a year are automatically eligible for overtime pay. Under the proposed rule, the salary threshold would increase to a projected $50,440 per year in 2016 and would be updated automatically each year in order to keep up with rising costs.

On Feb. 9, 2016, 108 bipartisan members of Congress signed a congressional support letter, addressed to DOL Secretary Tom Perez, expressing concerns about the proposed rule. Lawmakers are concerned about the unintended consequences for both employers and employees.

One of these concerns is the unclear explanation of the duties test, which is one of the main components used in determining whether employees are exempt from the FLSA provisions. In the proposed rule, the language is posed in question format instead of in a concrete way that employers can easily understand.

Another concern mentioned in the letter is that increasing the salary threshold by such a significant amount—113 percent—disregards the geographic diversity of the country. It states that since the purchasing power of a dollar is different in various parts of the United States, the DOL is ignoring the differences that exist between rural and urban areas.

If the rule is passed as drafted, its most negative impact could be on individuals entering the workforce and mid-level managers. Many small businesses cannot afford to increase their employees’ salaries and would be forced to take actions that could include reducing employees’ hours or shifting salaried employees to hourly status. This could mean a reduction in benefits and could be perceived by salaried employees as a demotion.

In addition, employers would need to re-examine employees’ exemption statuses, review and revise overtime policies, notify employees of changes and adjust payroll systems. Employers may also incur additional managerial costs because they might need to spend more time tracking when employees clock in and out.

The DOL, on the other hand, projects that the higher salary level requirements could actually simplify the process of employee classification because employers would not be required to perform a duties test for employees making less than $50,440 per year, which, in turn, could result in fewer lawsuits and lower legal costs for employers.

The DOL invited the general public to comment on the new rule from June 3 to Sept. 4, 2015, during which it received more than 200,000 comments. The comment period is now closed and a final rule is expected in the summer of 2016. The time between the date the final rule is announced and the date it goes into effect could be short—giving employers little time to make changes.

The Final Regulations could be released as early as May or June, but likely no later than July 7th, with an effective date likely on or before Labor Day, September 5th.  Employers should consider the impact these regulations will have on their current workforce classifications in advance of the effective date.

Matt Bauer

FLSA Overtime Rule Change