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The Department of Labor put into motion its change to the Fair Labor Standards Act Overtime Rule by submitting its final rule to the Office Management and Budget (OMB) division, which would significantly increase the income threshold for salaried employees eligible for overtime. The OMB has 30 to 90 days to review the final rules, and then publish the rules in the federal register as final.

The most significant proposal in the overtime rule change is the increase in the salary requirement. Currently, in order to qualify for the overtime exemption, with very limited exceptions, the employee must work 40 hours and be paid a minimum salary of $455 a week, or $23,660 per year. The new proposal would raise the minimum thresholds to $970 a week, or $50,440 a year. But the Department of Labor also proposed to index the salary for future increases, so it would be tied to some number where the salary increases automatically on an annual basis. The new rules may also contain a “duties test” that would govern how much labor managers are doing (cooking and serving) compared to their time managing.

The Protecting Workplace Advancement and Opportunity Act legislation has been introduced in both branches of Congress to delay publication of the Department of Labor’s final rule and require the Department to first conduct an economic impact analysis. The Senate and House companion bills were introduced in response to concerns raised by stakeholders, including the National Retail Federation and 1,500 restaurant operators who filed comments with the Department of Labor. According to The National Retail Federation, it will cost retail and restaurant businesses approximately $745 million to comply with the new rules. Operators are concerned that they will not be able to afford to pay affected workers the increased salaried amounts. Thus, salaried workers may be converted to hourly workers and have their base wages lowered. If The Protecting Workplace Advancement and Opportunity Act is passed, the bill could push the Department of Labor’s final rule far enough into the future that it would be at the mercy of the next Congress and President because the Congressional Review Act states that if a major rule is submitted to Congress with fewer than 60 legislative session days on its calendar, the next Congress gets 60-days to consider the rule. The bill was introduced in the House by Tim Walberg (R-MI) and in the Senate by Tim Scott (R-SC).

Employers should take the following six steps now to prepare for the changes:

1. Review existing job classifications

If job descriptions are not current, they should be updated to reflect the employee’s current role. Having an accurate description of each employee’s responsibilities and authority level will serve as a basis for applying the FLSA duties test for exemption from overtime.

2. Determine which employees are affected by the proposed changes

Determine if employees who are exempt under current regulations will be exempt under the new rules. Employers will need to decide whether to increase the salary of those employees that do not meet the new salary threshold in order to continue to classify them as exempt, or whether to convert their salary to an hourly rate by dividing the salary by either the number of hours typically worked or by 40 hours.

3. Analyze business impact of the proposed changes

While dividing the salary by the number of hours typically worked may be the least expensive option, at least initially, for employers when converting employees from salary to hourly, this method has the potential to significantly affect employee morale. Employers should consider both the direct financial impact of their decisions (additional dollars spent on wages) and indirect financial impact of their decisions (loss of productivity due to decline in employee engagement levels) when making decisions about how to handle the proposed overtime rules changes.

4. Evaluate business environment

Now is an ideal time for employers to look at their processes to determine if efficiencies can be gained through revised operating procedures. Efficiencies can lead to a reduction of work hours for employees who will be eligible for overtime under the proposed regulations. 

5. Ensure that there are systems in place to accurately track hours worked and properly calculate overtime

Since many employers may have an increased number of hourly employees, attention should be paid to both how hours are tracked and how overtime is calculated.

6. Review your company policy regarding work performed after hours

Many employees check work emails or take business related phone calls while they are not at work. If those employees are exempt, they are not entitled to additional pay for time worked on their own. For non-exempt employees, however, all time worked is compensable, whether it is in the office or out of the office and during work hours or after work hours. Companies may need to consider implementing an Hours of Work Policy specifically stating that non-exempt employees should not use electronic communication devices for work related activity after work hours unless otherwise required by management.

McDonald Hopkins will continue to track the proposed final rules and any decision of the Office Management and Budget division of the Department of Labor, and will update you accordingly.

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