On May 18, the U.S. Department of Labor published the final rule updating overtime regulations under the Fair Labor Standards Act. The Department of Labor estimates that more than 50,000 employees and their employers in Arkansas will be affected by the changes. Here's our initial take on the changes, the traps to avoid and how to prepare.
Key Provisions
The main thing we've all been waiting for is the new salary level for the administrative, professional and executive exemptions. The new regulations set the level at $913 a week, or $47,476 per year. That is a significant increase of $458 per week, and that's the new reality for employers that will take effect on Dec. 1.
Among the other changes:
- Salary levels will be adjusted every three years (instead of every year as originally proposed) beginning in 2020.
- The "highly compensated employee" exemption level jumps from $100,000 per year to $134,004 per year.
- As we predicted in our "In the Workplace 2016" article earlier this year, the Department of Labor's new overtime rule does in fact allow the inclusion of bonuses when determining an employee's total pay for purposes of the administrative, professional and executive exemptions. Non-discretionary bonuses, incentive payments and commissions paid on a quarterly or more frequent basis can account for up to 10 percent of the required salary level. Such payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability, and employers are allowed to make a "catch-up" payment in any given quarter to ensure an employee's salary level in fact reaches the minimum level.
Avoiding Traps
One of the main questions we've received is this: Can an employer get around the new overtime rules by treating employees as independent contractors?
The answer is an emphatic "no," unless you want to get in trouble with various government agencies, including the Department of Labor and the Internal Revenue Service.
Another potential trap we see: trying to limit your new, non-exempt employees to just 40 hours of work per week. Chances are, your previously exempt employees were working more than 40 hours per week before the overtime rules change, and this might carry over the temptation of your employees to work off-the-clock.
A related pitfall of trying to limit employees to working 40 hours per week: penalizing employees for working unauthorized overtime. While the common sense approach might be to withhold payment for unauthorized work time, chances are your business did, in fact, benefit from the work. To avoid any claim that you violated the Fair Labor Standards Act by refusing to pay for overtime work, you should discipline employees (through verbal or written counseling) for any unauthorized work time, but pay them for the time worked.
Finally, be aware of how employees use home computers and smartphones. Previously exempt employees who could work and communicate with you 24/7 are now on the clock. Anything other than a minimal amount of time spent working or communicating should now be compensated. These previously exempt employees may have the hardest time recording that extra time. You'll need to help them with that transition and stay on them about accurately recording their time.
How to Prepare
Will there be bumps in the road for employers making working to follow these new rules? Undoubtedly. But you can prepare by doing the following:
- While the new rules don't go into effect until Dec. 1, have your newly non-exempt employees start recording their time now. This helps in two ways — it gives you an idea of just how many hours a week they work, and it gets them in the habit of accurately recording their time.
- Start talking to your employees now about the transition and why it's happening. Although no one is being demoted and no job duties are being changed, some of your previously exempt employees will feel as if they have taken a step backwards. Help them ease into the new reality all businesses are facing.
- Decide how you're going to handle after-hours communications and work. Are you going to take away 24/7 access through computers and smartphones, or are you going to ensure that any work time is recorded and compensated?
- Consider the use of the "fluctuating workweek" method of calculating overtime, which results in half-time overtime instead of time-and-a-half overtime. (But be prepared; this method is extremely complicated to administer.)
- Bite the bullet and increase the pay of those now-exempt employees making less than the new standard. Remember, up to 10 percent of the salary under the new rule can be in the form of a non-discretionary bonus, incentive payment or commission.
- Make sure you have a written policy warning employees about working off-the-clock and mandating that they accurately record their time.
Additionally, the Department of Labor has provided summaries and guidance documents for businesses, nonprofits, state and local governments and higher education:
- Nonprofit summary and guidance documents
- State and local government guidance document
- Higher education summary and guidance documents
- Private Employer guidance document
This transition won't be easy, but at least you have six months (instead of 30 to 60 days) to adjust to the Department of Labor's new rules. Don't wait until the last moment to start your transition.
(Stuart Jackson is an attorney at Wright Lindsey Jennings LLP of Little Rock. You can email him here.)