Employers have until Dec. 1 to comply with new FLSA overtime pay regulations
By Stacey Sheston and Thomas O’Connell, Best Best & Krieger.
The U.S. Department of Labor has released final rule changes significantly expanding overtime pay eligibility for salaried employees — raising the current overtime entitlement ceiling from $23,660 annually to $47,476. The move will have a significant impact on all California labor arenas.
With the rules finalized, employers will be forced to review and update employee classification and operational guidelines to ensure compliance with new federal regulations. Changes will have to be made quickly, as the final rule goes into effect Dec. 1.
While state and city governments are subject to this new rule, many public employees won’t be affected. For example, the new threshold has no impact on workers currently classified as non-exempt (or hourly), workers with work weeks of 40 or fewer hours, or highly compensated salaried workers.
Under the Fair Labor Standard Act – which sets standards for private, federal, state and local employers — hourly employees are automatically eligible for overtime pay. Salaried employees, too, unless specifically exempt, must receive overtime pay. Employees must meet certain standards to be exempt from overtime pay, including executive, administrative and professional employees who are paid a salary.
Workers classified under these “white-collar exemptions” have been excluded from receiving overtime pay for decades. But, under FLSA standards, the employee’s actual job duties, not their title, determines their exemption from overtime pay. The ruling did not modify the Labor Department’s standard duties test, to determine the eligibility of workers — earning more than the salary threshold — for overtime, which employers had argued would be too difficult and costly to implement.
Overtime lawsuits have long been filed against employers whose workers have alleged they were wrongly denied, or misclassified as exempt from, overtime pay. The Labor Department’s updated wage regulations seek to clear up these gray areas.
Workers under FLSA have been assured a “minimum standard of living necessary for health, efficiency and general well-being.” Long unchanged rules though have left workers, earning as little as $24,000 a year — roughly the poverty line for a household of four — open to overtime pay denial.
The Labor Department has raised the salary threshold to twice its current standard of $455 a week — $23,600 annually, approximately the 20th percentile of earnings for a full-time salaried employee. Now, full-time salary workers making $913 in weekly pay — or $47,476 a year, an amount equivalent to the 40th percentile of earnings, are entitled to overtime compensation for any work done over 40 hours in a week. The Labor Department also increased the salary threshold for highly compensated employees from $100,000 a year to $134,004, equal to the 90th percentile of earnings for full-time, salaried workers.
The final regulations call for the threshold to automatically increase every three years, beginning in January 2020. This move will maintain the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage Census region, currently the South. It’s estimated to be $51,268 in 2020.
For the first time, bonuses, incentive payments and commissions will count toward 10 percent of the salary threshold, provided payments are made on at least a quarterly basis. This move, the Department said, recognizes the importance these forms of pay play in compensation agreements.
These changes in wage regulations are expected to boost employee wages nationwide, with the income transfer from employers to employees approximated at $1.2 billion per year, according to Department of Labor estimates — having a substantial impact on future labor costs. The Department says the ruling extends overtime coverage to some 4.2 million workers based on their salary alone.
While well intended, the Labor Department’s aim, to reduce the misclassification of overtime eligible workers by establishing a clearer separation between exempt and nonexempt white-collar workers, creates a number of issues and potential compliance pitfalls for employers.
Employers may now be forced to make significant changes to their operations and consider implementing policies to reduce the risk of employees performing unscheduled work beyond the weekly 40-hour overtime threshold. Policies governing how employees work from home, or whether or not the action is permitted, should also be reevaluated to avoid situations where there is little oversight over hours worked.
Facing new regulations, employers may choose to reclassify employees from salary to hourly workers while placing strict guidelines on whether or not employees are permitted to work more than 40 hours in a week without prior management authorization. Alternatively, salaried white-collar employees in California — where wages and cost of living expenses are higher than across much of the nation — could see slightly higher paychecks if employers choose to bump up their pay to boost them over the new threshold.
Regardless of the route taken, employers will need to perform wage and hour audits to assess whether their current employee classifications remain correct under new salary thresholds. Workers’ duties, too, will need to be addressed — particularly those of employees who are impacted by the new compensation rule.
Stacey N. Sheston, a partner in Best Best & Krieger LLP’s Labor & Employment practice group, is a litigator and advisor representing clients in proceedings arising from unpaid wages, wrongful termination, breach of contract, harassment, discrimination and retaliation claims. She advises a wide-array of employers on all aspects of day-to-day employment issues and assists in drafting employment agreements, handbooks and policies. She can be reached at firstname.lastname@example.org.
Thomas O’Connell is an associate in Best Best & Krieger LLP’s Business Services, Labor & Employment and Municipal Law practice groups who focuses his practice in business, employment, construction, corporate, real estate and surety litigation. In his broad practice, O’Connell represents public and private clients through all aspects and stages of litigation. He can be reached at email@example.com.