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New York Employment Law Blog

Saturday, May 28, 2016

New Overtime Rule: Costs v. Benefits

How does the new overtime rule impact business owners?

The Labor Department issued sweeping changes this month to overtime rules regarding the "white collar" exemptions under the Fair Labor Standards Act for executive, administrative, professional and highly-compensated employees.

New Overtime Rule at Glance

As of December 1, 2016, employees earning an annual salary less than $47, 476 ($913 a week) will be entitled to overtime pay if they work more than 40 hours a week. This more than doubles the current threshold of $23,660. Employers can factor bonuses, incentive pay and commissions up to 10 percent of the threshold, provided these are paid quarterly. Further, the rule calls for an increase in the exemption amount every three years beginning January 1, 2020. The increase will be based on the 40th percentile of weekly earnings of full-time salaried employees in the lowest region of the country.  Finally, the exemption threshold for highly-compensated employees will be raised from $100,000 to $134,004. This amount will also be adjusted every three years based on the 90th percentile of full time workers in the lowest-wage region.

Access to the Middle Class

The rule is designed to make low-salaried employees who work long hours, but are classified as exempt since they perform managerial tasks, eligible for overtime pay. While the new rule will require many employees to be reclassified, the FLSA's duties tests have not been changed. The goal is to expand access to the middle class by making 35% of salaried workers eligible for overtime pay, or an additional $12 billion in pay over the next decade.

Who will foot the bill?

The new rule will have a significant impact on the retail and restaurant sector, but many small businesses in the private sector as well as government agencies, social service organizations, universities and non-profits will be hard pressed to find ways to comply. In short, expanding access to overtime pay will invariably force employers to reclassify employees, restructure their compensation cycle or shift job duties. In other words, the new rule will affect business operations and also cost money.  

What This Means for Employees

Many workers will be affected by the rule in a number of ways. In some cases, employees will begin to earn more by making overtime while others may be given salary increases above the new threshold. At the same time, some workers may see their hourly rate lowered to offset the overtime increase or have their workday restricted to 8-hours. In some cases, employees reclassified as nonexempt may see a reduction in hours and pay.

As workers are reclassified from exempt to non-exempt, employee benefits could also affected. In particular, these employees may see changes to their vacation accrual schedules and health benefits or they may no longer receive bonuses. Moreover, reclassifying employees who may have previously had managerial duties could adversely affect morale. Lastly, there are also concerns that the new rule could lead to pay inequities and wage compression.

The Bottom Line

Businesses will be faced with a number of challenges leading into the year-end effective date. First, employers must weigh the costs of reclassifying employees against raising their base salaries. In addition, employers will also be required to train supervisors on managing non-exempt employees' work schedules and new procedures will need to be implemented to track hours. Finally, businesses will also incur compliance and operations costs associated with implementing these changes. In sum, the Labor Department's new overtime rule presents a host of complexities that require the advice of an experienced employment law attorney.


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