Prepare for the Impending Changes to Overtime Pay | DCR Workforce Blog

Prepare for the Impending Changes to Overtime Pay

time-moneyWhile congress continues to debate the merits of increasing the minimum wage, the time to revise overtime policies is here! A Presidential memorandum issued on March 13, 2014 requires the Department of Labor (DOL) to update its regulations regarding eligibility for overtime payments.

Exempt vs. Non-Exempt

To over-simplify a bit, a worker is considered as ‘exempt’ and paid on a salary basis if the individual is paid a “guaranteed minimum” amount of money for any work week if “any” work is performed. Non-exempt workers are usually paid on an hourly basis, wages fluctuate by the number of hours worked, and these individuals qualify for payment at a higher rate (i.e., the ‘overtime rate’) after a specified number of hours in the work week. The FSLA defines regular hours as 40 hours in a week, while some states go further, making workers eligible for overtime rates after working 8 hours on any given day.

Under current Federal laws, the determination of whether a worker is classified as “exempt” from overtime payments or “non-exempt” depends on how much the worker is paid, how the individual is paid, and the type of work that the individual does. Workers must meet three “tests” outlined in the Fair Labor Standards Act (FLSA) Regulations to be considered as exempt.

Salary level test – Employees who are paid less than $23,600 per year ($455 per week) are nonexempt. (Employees who earn more than $100,000 per year are almost certainly exempt.)

Salary Basis Test – An employee is considered to be paid on a salary basis (not eligible for overtime pay) when base pay is computed from an annual figure divided by the number of paydays in a year. In these situations, the employee’s actual pay is not reduced in work periods when fewer than the normal number of hours are worked.

Duties Test – After meeting the salary level tests and also the salary basis tests, a worker’s duties are evaluated. The actual job tasks must be evaluated, along with how the particular job tasks “fit” into the employer’s overall operations.There are three typical categories of exempt job duties, called “executive,” “professional,” and “administrative.”

Motivations for Change

The current point of salary eligibility ($455) was set in 2004, and it has not been adjusted since. In directing the Department of Labor to review and revise the overtime policy, the President noted that if the rate had been adjusted for inflation, the threshold would now be $553 per week. The White House went on to state that if the original threshold set in 1975 at $250 per week had been adjusted for inflation, anyone earning less than $970 today would be entitled to overtime pay.

States can establish their own thresholds as long as they meet or exceed the Federal statute. California and New York have been the most progressive, setting state thresholds of $640 per week and $600 per week, respectively, with the caps set to rise to $800 and $675 in 2016.

While we are probably a year away from new directives from the Department of Labor, most economists expect that new thresholds will make as many as 10 million more workers eligible for overtime pay. As we await the response from the Department of Labor, let us look evaluate the drivers for and possible implications of this change.

It is DCR’s opinion that the Presidential directive is motivated by more than a desire to increase the incomes of many U.S. families. A new record high was reached for federal wage-and-hour lawsuits filed under the Fair Labor Standards Act in the 2012-2013 year. Analysis conducted by the Federal Judicial Center indicates that 7,764 FLSA cases were filed April 1, 2012, to March 31, 2013, an increase of 10 percent from the previous year’s figures. Many of these suits resulted from the lack of clarity regarding what constitutes “executive” and “administrative” exempt duties.

Definitions date back to the Roosevelt administration, and are based on roles in an industrial workforce. They don’t fit as well in a service-based economy. A duties test renders a worker exempt from overtime pay when any time is spent in a supervisory rule. While “learned professions” are exempt, confusion abounds regarding the difference is status between accountants and bookkeepers, registered nurses and LPNs, inside and outside sales representatives, programmers and database administrators. As a result, we also see an increasing number of staffing agencies being penalized for improperly classifying workers placed on assignment with their clients.

Preventive Measures

When last amended, litigation extensively delayed implementation. Having proposed the new regulations, the Wage and Hour division of the Department of Labor can be expected to spend considerable time and effort to ensure its implementation through increased audits. DCR encourages employers to take steps to eliminate the common mistakes which could be turned up in such a situation. Here is a list some of the common mistakes made by employers, leading them to violate the law:

  • A regular salary alone does not exempt a worker in a non-supervisory position from overtime pay, unless it is above $455 per week.
  • When a worker is paid a fixed salary and works fluctuating hours the worker is not eligible for overtime pay, provided the pay rate is above the stipulated minimum threshold. If worker’s salary is made on a pro-rata basis in a short work week, the employer will have to pay overtime for weeks in which the worker put in more than 40 hours of work.
  • Some employers assume that obtaining a written agreement from workers to forego overtime pay protects them from liability for not paying it. But recent legal rulings demonstrate that workers cannot sign away their legal rights
  • Workers who receive tips from customers are still eligible to receive overtime pay, provided their pay and tips combine to offer them less than the minimum threshold.

DCR encourages companies to prepare for the possibility of changes by taking immediate steps that may minimize risks of non-compliance or of improper payment. Begin by auditing the status of all current workers. Seek assistance from employment attorneys for positions requiring clarification. Review work policies to ensure controls to verify that overtime work has been properly authorized, time is accurately reported, and protocols for addressing pay inaccuracies are clear. Implement systems that automate work scheduling, worker classification, time reporting and approval, and payroll computation. This will eliminate errors and provide extensive reporting and auditing capabilities.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.