Why Employers Need to Evaluate the Overtime Rules Early in 2016.

The Fair Labor Standards Act (“FLSA”) is quite possibly the labor law that employers grapple with more than any other. The regulations can be murky at best when actually applied and the price tag for running afoul of the regulations is staggering. Aside from the ever-vigilant and watchful eye of the Department of Labor (“DOL”), employers continue to face increased scrutiny and potential liability for FLSA violations in private lawsuits. Between 2011 and 2014, the number of FLSA lawsuits increased more than 19%. A great majority of these lawsuits stem from the misapplication of the rules regarding overtime exemptions or failure to properly pay overtime. 

The bad news is that more change is coming in 2016. The good news is that these changes are an opportunity for businesses to come to grips with the changes and smoothly make any necessary adjustments to current practices, regardless of whether those adjustments directly relate to the new regulations.

In 2014, President Obama directed the DOL to modernize the overtime regulations for executive, administrative, and professional employees. These regulations govern whether such “white collar” employees are exempt employees or nonexempt and therefore entitled to overtime pay.

To qualify for these white collar exemptions, employees must meet the requirements of the “duties” test and a “salary” test. The salary threshold has been relatively low in recent years and employers have applied the white collar exemptions without carefully examining whether employees also qualify under the duties test. To satisfy the test, an employee’s duties must be supervisory or entail non-manual work involving management of business operations or the exercise of independent judgment and discretion in matters of significance to the employer.  

On June 30, 2015, the DOL released its Proposed Rule, under which the DOL estimates that almost five million additional white collar employees will become entitled to overtime pay. The Proposed Rule would increase the current minimum salary for white collar employees from $455 per week (or $23,660 per year) to a minimum of approximately $970 per week (or $50,440 per year), a 113% increase to the salary threshold requirement. Any executive, administrative, or professional employee not earning the new minimum salary threshold would no longer qualify as an exempt employee and thus become one of the estimated five million additional employees entitled to overtime in 2016. The Proposed Rule would automatically increase the minimum salary threshold annually based on nationwide salary data.

While the white collar exemptions for executive, administrative, and professional employees are some of the most commonly used by employers, they also tend to be some of the more frequently misapplied exemptions. The DOL has not failed to notice the difficulties employers face in determining the applicability of the white collar exemptions and, in no uncertain terms, has made clear that the investigation and prosecution of overtime violations is, and will continue to be, one of its top priorities.

What does all of this mean for employers?  By mid-year, employers should expect the DOL’s Final Rule to be published with the revisions to the salary threshold. The changes will be effective within 60-90 days after publication. So there will be little time to come into compliance. Employers should take the opportunity between now and the publication of the Final Rule to fully evaluate whether employees currently classified as exempt from overtime in fact meet both the duties test and salary threshold requirement.

Following are some best practices to conducting an internal FLSA audit: 

1.       Carefully review all exempt salaried positions to determine whether the positions meet the applicable duties test; 

2.       Evaluate whether the increase in the salary basis test will affect any classification; 

3.       Implement any necessary changes to your timekeeping and overtime approval policies or practices; 

4.       Ensure all deductions from salary are permitted under the regulations; 

5.       Assess the cost impact of any changes in classification of the affected employees or the government contract, if applicable; 

6.       Seek an opinion from legal counsel trained to assist with FLSA classification analysis. 

By conducting a thorough FLSA audit, employers will be prepared for the upcoming changes and position themselves well to avoid the costly liability that could result from a DOL investigation or overtime lawsuit.