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New Overtime Rule: What You Need to Know

Come December, 67,000 South Carolina workers will be newly eligible for overtime pay, following a revision of federal rules governing when overtime must be paid. Employers must take steps now to prepare for this rule, which goes into effect December 1, 2016 and will impact employees’ job duties, payroll expenses, and how work is assigned.

Depending on your point of view, the U.S. Department of Labor (DOL) regulatory change is either a severe burden for businesses – especially small businesses that may have less flexibility in how work is assigned – or a long overdue revision to allow lower-paid salaried workers to catch up to the rest of the economy.

Nationwide, the DOL estimates that about 4.2 million workers could benefit from the rule. In South Carolina, it will affect approximately 30 percent of salaried workers.

Announced May 18, the change addresses the overtime pay rule that is part of the Fair Labor Standards Act (FLSA). When Congress passed the FLSA at the tail end of the Great Depression, it mandated that workers had to be paid overtime at a rate of time-and-a-half for all hours over 40 worked in a given week. Exceptions were carved into the law, including exemptions for employees who worked in executive, administrative, outside sales, or professional jobs. (The logic behind these exemptions is that with this level of responsibility comes an obligation to get your work done, regardless of the clock.)

However, in addition to proscribing a baseline for the duties these employees engaged in on a day-to-day basis, Congress said employers could exempt only those employees who were paid a minimum salary.  Since 2004, the minimum salary for each of these exemptions has been $455 per week, or $23,660 per year. In addition, employees compensated over $100,000 per year (and paid a weekly salary of at least $455 per week) could be exempt regardless of their job duties.

Here is an overview of what changed

  • Starting on December 1, employees must be paid a minimum of $47,476 per year, or $913 weekly, in order to be exempt from federal overtime pay requirements based on the Executive, Administrative, Professional, and Outside Sales Exemptions.
  • The salary minimum will now be automatically updated every three years based on economic indicators.
  • Nondiscretionary bonuses and incentives, including commissions, may count toward 10 percent of the threshold pay.
  • Anyone making $134,004 or more is exempt from the overtime rule, regardless of job duties. That’s up from $100,000.

Here is what didn’t change

  • As has always been the case, workers are not automatically exempt from overtime requirements just because they earn the minimum salary -- now $47,476 annually. Their job duties must still qualify under the existing guidelines for exemption.
  • Under the existing rule, employers have wrestled with the “duties test,” the criteria for determining whether an employee qualifies as an executive or one of the other exempt job descriptions. Although there was a widespread expectation the criteria would change, the DOL left these guidelines intact. If an employee currently qualifies for an exemption and meets the new salary threshold, the exempt status stands.
  • There is no change in the minimum wage.

How to get ready

  • Contact your employment counsel. Work with an attorney to develop a strategy for making any changes required by this rule as smooth as possible.
  • Do the math. Employers may have to give some workers a pay bump, hire part-timers to take up the slack, cut hours or find ways to get the job done without the extra hours. It’s likely that many employers don’t actually know how many hours their managers are working. Now is the time to start auditing those hours and looking at the job functions of affected employees.
  • Review job descriptions. Although the duties test isn’t changing, we suspect all the noise about the new overtime rule will prompt many employees to look at whether they were properly classified as exempt, regardless of salary. We have long preached the importance of job descriptions; make sure they accurately describe the work employees are actually doing, and use them to determine whether employees may be classified as exempt.
  • Be prepared for unexpected morale issues. Some employees will see a change from exempt to non-exempt as a demotion, and employees who routinely put in 45 hours because they take pride in their work may not take it well if they are told to pack it in at 40 hours. These actions are frustrating to good employees.
  • Review your policies. Update policies regarding employee classification as appropriate, and be sure you have an open door policy in place that encourages employees to take their questions and concerns to the appropriate managers, rather than to the DOL. Some employers may also choose to update vacation, holiday pay, overtime, or other similar policies in conjunction with the required changes coming.

What you don’t know can hurt you

Don’t turn a blind eye toward conscientious employees who quietly put in extra hours without be asked to do so. You don’t have to ask an employee to work overtime to be liable for back pay – you merely have to tolerate it.

Check your overtime policy and make sure everyone understands what is expected, including the need for prior approval of working extra hours and not coming in early or working through lunch to catch up.

The new rule is subject to review by Congress, but the president initiated the change, and there is no expectation that congress will push back.  A new administration could roll back the rule next year, but don’t count on it. Rolling back salaries for millions of Americans would be a nonstarter for any new president, regardless of how he or she might have viewed the change.

This change is here to stay, and now is the time to take stock of how your business should adjust to accommodate it.

Jessica L. Gooding is member of the Workplace Law Group in Turner Padget's Columbia, S.C., office. She may be reached at (803) 227-4338 or by email at jgooding@turnerpadget.com.

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