April 15, 2016

Alert: Update on Publication of the New FLSA Overtime Regulations

Employment Alert

The final overtime rule is edging closer to release: the U.S. Department of Labor (USDOL) has sent its final changes for determining which workers are eligible for overtime pay to the Office of Management and Budget (OMB) for an administrative review. Procedurally, this is the final step before a new regulation is published as a final rule. OMB’s final review could take several months or just a few weeks. Once complete, the final rule will be published in the Federal Register and take effect within 60 days of publication.

Commentators believe that the final rule will work its way quickly through OMB and most likely be published by July 7, meaning it would take effect on Labor Day, Sept. 5. That has obvious symbolic meaning. Alternatively, considering other significant events taking place this fall, if the rule is published on September 2 -- the Friday before Labor Day -- it will take effect on November 1, the day prior to Election Day.

Although the proposed regulations were issued in July 2015, the differences between those proposed regulations and the final rule won't be made public until the final rule is actually issued.

According to the Unified Agenda and Regulatory Plan, published in November 2015 by OMB, the earliest the final rule could be released would be in July. Timing is important. Under the Congressional Review Act, a joint resolution from both houses of Congress and the President can undo laws and rules passed during the final 60 legislative days of the previous Congress. In other words, the Obama Administration must work quickly so that the regulations take effect before President Obama leaves office and to protect the new regulations from being overridden, if a Republican wins the White House.

Employers ought to be planning now for implementation of the new regulations. Among the changes likely to be reflected in the new regulations when they are published include:

  • The salary threshold under which employees would be required to receive overtime pay (regular hourly rate x 1.5 for all hours worked beyond 40 hours in a given workweek) would be the 40th percentile of average weekly earnings in the U.S. The USDOL has projected that the 40th percentile weekly wage in the final rule will be $970, or $50,440 per year for a full-time employee. This represents a significant jump from where it currently stands -- $23,660.

  • This new salary-level threshold will be annually updated, based either on the percentile or indexed to inflation.

  • For highly compensated employees (considered exempt without regard to any duties test), the new annual salary threshold will be $122,148, which is up from the current level of $100,000.

It remains to be seen whether changes in the applicable duties test will be incorporated into the new regulations. No proposed changes to the duties test were reflected in the proposed rule published in 2015.

To avoid paying overtime to employees who would need to be reclassified as nonexempt, employers might consider increasing the employees’ salaries to a level above $50,440. Alternatively, employers might considering reducing the hours of employees who would be newly non-exempt and eligible to receive overtime. A third option is to adjust the hourly rates of newly non-exempt employees downward so that, when their additional overtime pay is considered, their overall weekly compensation remains unchanged. Most employers will implement some combination of these tactical options in order to control the financial implications of the new regulations.

Over the next 90 days, all employers ought to begin modelling the potential payroll costs and effects associated with the new standards. There are various options for responding to the regulations and prudent employers should be evaluating the various options well before the new regulations take effect. Preti Flaherty has developed self-audit guidance and a menu of tactical options that can be tailored to address your specific workforce needs.

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