The long-awaited overtime rule: What employers need to know right now

The details have been hammered out. The Office of Management and Budgeting (OMB) has collected the feedback, reportedly among the most ever given. Now, the curtain is ready to rise.

Within a few days, so the rumors go, the Department of Labor will unveil a new rule (only the second in more than 40 years) that will raise the minimum salary an employer must provide to avoid having to pay overtime to executive, administrative and professional employees.

Many if not most US employers will need to figure out exactly how they are going to handle the new overtime rules, which effectively will raise the exempt (overtime no) vs. non-exempt (overtime yes) threshold from the current $23,660 annually to somewhere between $45,000 and $50,400.

Why now

The rule, proposed by the DOL in June 2015, would set the standard salary level at the 40th percentile of weekly earnings for full-time salaried employees. They also noted the rule would extend overtime protections to nearly five million white collar workers within the first year of its implementation.

The rumors that the DOL will act by the end of the week were driven in part by the outside chance a seldom-used but potentially significant law known as the Congressional Review Act (CRA). With the CRA lurking, it’s believed by some that the Department wants to publish the final rule and provide the required notices to Congress by May 16, next Monday.

According to Alexander Passantino, a partner in the D.C. office of law firm Seyfarth Shaw, and former acting administrator of the Labor Department’s Wage and Hour Division, regulations submitted to Congress after that date are expected to be subject to the CRA’s “clawback” provision, which would push the deadline for Congress to vote to “repeal” the rulemaking into the next – and possibly more employer-friendly – administration. Or so the theory goes.

Passantino says the final rule has the potential to impact the exempt status of a wide variety of positions in virtually every industry. Apart from the new threshold for exempt vs. non-exempt, Passantino expects no specific changes to the “duties tests.”

He adds that the final rule will almost certainly be a “major” rule, which means that the rule cannot be effective for at least 60 days following its publication in the Federal Register. He explains that one of the major concerns raised by employer groups in their meetings with OMB, however, has been the difficulty they will have implementing a change to the salary threshold in such a short period of time, particularly when no employer knows what that salary threshold will be (until presumably this week or soon thereafter).

Why the rule is so difficult

Upon learning of the salary level, employers will need to determine which positions are impacted and assess whether to convert each position to non-exempt, raise the salary level, or engage in some restructuring of the organization to better accommodate the new salary requirement. In addition, employers will need to consider how their decisions will impact the whole organization, not just affected positions.

Compounding the difficulty in implementing salary threshold changes are:

The technical requirements for implementing such changes in payroll systems
The need to train newly non-exempt employees on timekeeping matters (and, potentially, to add more time clocks to account for the new population)
And the state law requirements to notify an employee of changes to the amount or method of pay in advance (in some states a pay period in advance).

Add to that list the creation of communications plans needed to properly implement each of these elements, and it is clear that a 60-day implementation would be extremely difficult.

As a result, the employer community has asked OMB to provide for a longer effective date period. In 2004, the Department gave employers 120 days to implement a far more modest salary increase, and many are “hopeful” that it will do the same here, Passantino says.

Whether the effective date is 60,120 or even 180 days, implementation of the Department’s changes is going to require prompt and focused action by employers. Employers would be wise to identify now, if they have not already done so, the positions that may be subject to the salary threshold increase.

What employers need to do

Employers also may take this time to determine how much lead time will be necessary to implement any changes by their payroll and timekeeping vendors and to assess whether training regarding timekeeping practices and general management of newly reclassified non-exempt employees is desirable (and, if so, when and how to provide it).

Allan S. Bloom, co-chair of Proskauer’s Wage and Hour Group, says employers that were gearing up for a Fall 2016 effective date (based on the schedule the DOL has been publicizing since late last year) are now in the position of having to potentially accelerate their difficult pay decisions by several months. He adds that entry level managerial and professional jobs will be among the most affected.

These decisions, he says, will have to be made at a time when compensation decisions are usually not made, which will increase pressure on employers.

“As it stands, employers will have 60 days to bring their current salaries into compliance or start paying the affected workers overtime,” Bloom says. “Either way, the financial impact will be considerable, and employers are likely to look for other ways to recover the expense—including reduced hours, layoffs, and scaled-back benefits.”

Bloom explains that the rule change is a central piece of the Obama Administration’s broad program to put more money into workers’ hands across the country — a priority shared by a number of state and municipal governments, which have pushed minimum wage increases through their legislatures and expanded paid time off laws.

“The new rules are likely to include automatic annual increases in the minimum salary levels, meaning that employers will want to plan for the increases as part of their regular annual compensation exercises,” he says. “The timing of the annual increases is unclear.”

Bloom says HR and employers can expect the new rules to be a part of both candidates’ talking points during the presidential general election run-up this fall. For example, the Democrats will celebrate the increase in wages and promise a continued platform of expanding working rights and protections, while the Republicans will decry the activism by executive agencies in the current administration and point to both the adverse impact on the business community and the likely loss of jobs and benefits that will result.

What will actually happen?

Michael Cardman, a legal editor with XpertHR, says the DOL claimed that setting the salary level at the 40th percentile of earnings for full-time salaried workers was necessary to “adequately [distinguish] between employees who may meet the duties requirements of the EAP exemption and those who likely do not, without necessitating a return to the more detailed long duties test.”

As for the rumor that the new rule will be public before week’s end, Cardman is not convinced.

“This seems like a stretch when you consider that the CRA hasn’t been used successfully since 2001, and that the average review time is 53 days – four days less than the 57 days during which the rule has been under OMB review so far,” he says.

Cardman echoes the idea that between the new salary basis level and the widespread increases in state and local minimum wages, the wage floor will be substantially higher in the year or two ahead.

“It will be interesting to see what effect this has on companies’ compensation structures overall,” he says. “Will we see a squeeze at the lower end of the pay scale, with workers on the first rung or two of the ladder making barely more than their entry-level counterparts? Or will wages rise in tandem, with mid-level workers’ wages increasing at the same speed as the lowest-paid workers?”

Time will tell.