Huge Change in Overtime Law and How Employers Should Prepare

This week President Obama announced a new proposed rule concerning the ‘white-collar exemption" that will make ANY
employee – regardless of job title, duties, or how they are paid –
eligible for overtime if he or she makes $50,440 or less per year.
 
This is a 113% increase from the current rule’s threshold of $23,660! 
The Department of Labor has submitted the proposed rule for comment by
the public and it will likely go into effect next year.

If you are
thinking to yourself, “Well, I don’t have to worry about this.  My
employees are exempt because they are salaried.” – you are in a large
population of employers who misunderstand the white collar exemption.  An employer must satisfy three criteria under the exemption, and paying the employ a salary is only the first. 
The second criterion is paying the employee more than a set
compensation threshold – which is the subject of the new proposed
rule.  (Only certain employees (e.g., doctors, lawyers, teachers) are
not subject to these first two criteria.)  The third and last criterion
is that the employee must perform administrative, executive or
professional duties. 

Thus, the major significance of the new
proposed rule is that millions of employees will not satisfy the second
criteria because their annual salary will fall under the $50,440
threshold.  That means that any employer who currently does not
pay overtime to an employee making $50,440 or less a year will be
compelled to do so when the rule goes into effect next year.

So what should employers do now?

First, review
your employees’ job descriptions to ascertain whether they are actually
performing the type of work described in the description.  This is a
best practice anyway, but is particularly critical now.  For any
positions that fall in a grey area, consult with a lawyer.  Be careful
to discuss all issues pertaining to the classification issue with the
lawyer so that attorney-client privilege is preserved.

Second, review your records to ascertain which employees will become overtime-eligible due to the new rule change. 

Third,
for the newly-eligible employees, determine whether it will be more
cost effective to (a) pay them overtime, (b) put measures in place to
ensure that they do not work more than 40 hours per week, or © give
them a raise to exceed $50,440 annually.    

Fourth, for those
that fall under option (a), determine whether your company will
compensate newly overtime-eligible workers as salary + overtime or
hourly + overtime.

Fifth, for those that fall under option ©,
determine that the employee will also satisfy the third criterion of the
white collar exception – i.e., that their job duties are
administrative, executive or professional.   

One cannot overstate
how critical it is for employers to prepare now so that they  can
comply with the new regulation when it goes into effect next year. 
Failing to properly classify employees is extremely risky because it not
only leads to challenges by individual employees for unpaid overtime
that could reach back many years, but also can trigger class actions or
Department of Labor audits that could result in back-pay overtime awards
to other employees as well.

It is important to note that there is no exemption for nonprofits or small businesses. 
As long as a business or nonprofit does an annual volume of sales or
business of at least $500,000, the overtime regulations apply.  However,
for nonprofits, any charitable, religious, educational and similar
activity is not factored into this calculation as long as “such
activities are not in substantial competition with other business.”

Should you have any questions, please do not hesitate to contact me at 615-916-3224 or tmckee@mckenzielaird.com.

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