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On May 18, 2016, the U.S. Department of Labor (DOL) released a new rule that will overhaul overtime wage payment in the United States. The new rule will more than double the salary threshold that employees must meet to qualify for overtime wage payment exemption—a change that could affect more than 4 million workers across the United States.

What is Changing?

The Fair Labor Standards Act (FLSA) requires that eligible employees be paid time and a half for all hours worked over 40 hours in a workweek. However, overtime rules do not apply to certain “white collar” workers, like executive, administrative, professional, outside sales, computer employees and some highly compensated individuals—these are known as the white collar exemptions.

Currently, the salary threshold (salary level test) for overtime pay eligibility under the white collar exemptions is $23,660 a year or $455 per week. The new rule more than doubles the salary threshold to $47,476 per year or $913 a week. It also increases the $100,000 salary level for highly compensated individuals to $134,004 per year—the 90th percentile of full-time salaried workers nationally.

How will this affect employers?

The new rule is controversial since it will require employers to review employees’ exempt status, update overtime policies, notify employees of changes and adjust payroll systems. According to estimates from the DOL, employers will spend more than $592 million to comply with the new rule—representing a significant cost for employers.

Preparation Strategies

Employers must comply with the new rule by Dec. 1, 2016. Given the magnitude of this new rule, it is important to start preparing now for changes to overtime regulations. The following are some strategies employers can adopt:

  • Conduct an internal audit. It is estimated that more than 50 percent of all employer groups have misclassified their employees under the FLSA, although many do not realize it. An audit can help identify misclassifications and determine who will be eligible for overtime based on the new rule.

  • Give raises to employees who are close to the salary threshold. For instance, if an employee makes $45,000 a year and regularly works overtime, you could bump up the employee’s pay to $47,476 to avoid incurring overtime expenses.

  • Develop more stringent overtime pay policies. Consider sending employees home after exactly eight hours, so you do not have to pay overtime costs. This policy can help encourage a healthier work-life balance among employees; however, output may decrease as a result.

  • Reduce or cut benefits to make up for increased payroll expenses. While this method will protect your bottom line, it may decrease employee morale, lower productivity and result in higher turnover. In addition, there may be legal limitations to consider.

Compliance Penalties

If employers fail to respond to overtime changes, they can face various penalties prescribed by the FLSA, including lawsuits, criminal charges, fines and restrictions in commerce. For instance, employees who do not receive the overtime wages they are entitled to can sue their employers either individually or through a collective action. These cases can be very costly for employers to defend against and can harm your reputation within the community and your industry.

For more information on how the new white collar exemptions will affect your business and what you can do to minimize overtime pay, contact 360benefits today.

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