New overtime standards unveiled by the U.S. Department of Labor (DOL) last June made headlines due to the fact that it would expand overtime protections to an additional five million white-collar employees. After making its way through Washington’s regulatory approval channels, the proposed changes last month reached the last step in the finalization process: the federal Office of Management and Budget (OMB). The same day the proposal was submitted to OMB, Congress put forth legislation that would quash these changes and send DOL back to the drawing board to reconsider overtime reforms.
As regulatory and legislative forces wrestle over the outcome of these overtime changes, let’s take a step back and examine what the proposed regulations would mean for employee compensation.
Current overtime rules
Employees paid hourly are considered non-exempt and are automatically eligible for overtime pay, under the Fair Labor Standards Act (FLSA). Salaried employees, however, can be either exempt from overtime or non-exempt from overtime. Employees must fall under a certain wage threshold to be exempt from overtime. This threshold is $455 a week or less (which equals a yearly salary of $23,660 or under).
For those who make more than $23,600 a year, employers are required by the FLSA to perform a “duty test” to assess whether the employee’s duties are considered executive, administrative or professional. If the employee effectively qualifies for one of these classifications, they are permitted to be classified as exempt from overtime earnings under the FLSA’s “white-collar exemption.”
Proposed overtime changes
The new regulations put forth by DOL would more than double the prior threshold to $970 a week. This means that employees who earn a yearly salary of $50,440 or less are now eligible for overtime pay for hours worked over the standard 40-hour week. The new salary benchmark will also be adjusted automatically going forward on an annualized basis. The methodology for calculation has yet to be finalized, but could be tied to inflation indexes or based on 40 percentile of weekly earnings for full time salaried workers.
Issues not addressed by proposed changes
While it did not propose changing them in this set of regulations, DOL did solicit feedback how the current “duty test” is functioning and whether it should be altered to better calculate the “white-collar exemption.” Changes in these areas could further alter the calculation and payment of overtime, so comments and feedback are being closely monitored by trade associations like the Society for Human Resource Management. DOL also requested feedback on the possibility of using nondiscretionary bonuses (those that the employer is obligated to pay) to fulfill part of the salary requirement.
What’s next?
OMB review can take between 30 to 90 days. If approved by OMB, the new overtime rules could take effect anytime between 30 to 60 days after approval. Using this timeline, final publication could occur as early as June 2016. So it is imperative that businesses and HR professionals stay tuned and consider the impact to their operations should these regulations become official.
As we stay tuned for the outcome of these regulations, businesses with questions about how these changes may impact employee status or compensation may contact me at 717.394.5666 or dhoffer@rklcpa.com.
