Magazine

Rules/Regs | Published in November 2016

The New Overtime Rule

Getting to the crux of a complex matter

By Rebecca Moore | November 2016
Art by JooHee Yoon

This past spring, the Department of Labor (DOL) issued a final rule, which will take effect on December 1, updating overtime regulations under the Fair Labor Standards Act (FLSA).

The FLSA establishes minimum-wage, overtime-pay, recordkeeping and youth-employment standards covering employees in the private sector and in federal, state and local governments. Generally, employees of enterprises that have an annual gross volume of $500,000 or more in sales made or business done are covered by the FLSA. In addition, employees of certain entities are covered by it regardless of the amount of gross volume of sales or business done. These entities include: hospitals; businesses providing medical or nursing care for residents; schools—whether operated as for-profit or not-for-profit; and public agencies. The most recent rule modifies salary level thresholds for employees of these businesses who are not classified as exempt from overtime pay due to their performance of certain duties.

Although overtime eligibility has generally been considered in the realm of hourly, lower-paid jobs, that perspective should be revisited in light of the new rule. The “standard” salary ceiling for employees eligible to receive overtime pay will increase to $913 per week—equivalent to $47,476 annually for a full-year worker—up from $455 per week ($23,660 annually), per a DOL document answering frequently asked questions (FAQ) about the rule. The total annual compensation requirement for highly compensated employees to be exempt from overtime pay will increase to $134,004 per year, up from $100,000 per year. These levels will update automatically every three years, beginning on January 1, 2020, to maintain the earnings percentiles set in the final rule.

The DOL estimates that, as a result of the new rule, absent employer action, 4.2 million white-collar workers will become newly entitled to overtime protection because of the increase in the salary level. Or, as a result of employer action, many of these workers will be able to work fewer hours; will receive additional compensation when they work overtime; or will receive a salary increase to remain exempt.

Further, the final rule clarifies overtime requirements for 8.9 million currently overtime-eligible salaried em-ployees, 5.7 million salaried white-collar employees, and 3.2 million salaried blue-collar employees because their pay will fall below the new threshold, and no assessment of their duties, which can result in misclassification, will be necessary. An estimated 732,000 white-collar, salaried workers making between $455 and $913 per week do not meet the duties test and are already overtime-eligible, but their employers do not recognize them as such.

The DOL estimates that average annualized direct employer costs will total approximately $295 million per year over the first 10 years, including regulatory familiarization costs, adjustment costs and managerial costs.
 
But the overtime rules will not only increase employers’ compensation costs.

Effects on Retirement Plans

Steven Friedman, shareholder at Littler Mendelson in New York City, notes that the new overtime rule will have an effect on retirement plan sponsors that provide match contributions on employee deferrals or other employer contributions based on employee compensation levels.

According to Joe DeSilva, senior vice president/general manager of ADP Retirement Services in Florham Park, New Jersey, the additional cost for plan sponsors depends on what the plan document defines as compensation. “Plan sponsors have the opportunity to select whether to include overtime compensation,” he says. “In our book of business, the vast majority do. I think the additional cost will be somewhat sizeable.”

“It would appear from first blush that it would help plan sponsors with nondiscrimination testing rather than hurt them”—that is, if the non-highly compensated employees are deferring more compensation because they receive more pay, Friedman says.

However, it could go either way, says DeSilva. “More deferrals from the non-highly compensated could help plan sponsors pass the testing, but more deferrals from highly compensated employees could cause them to fail.”

What Plan Sponsors Can Do
Regarding the DOL’s qualification that, “absent any employer action, around 4.2 million white-collar workers could now receive overtime protection,” to what “employer action” does the DOL refer? Employers that do not want to pay current exempt employees at the new salary threshold may, in order to keep exempting them from the rule, consider reclassifying them as nonexempt. Employees could also maintain exemption status if they are paid, on a salary basis, an amount meeting the new threshold and they continue to perform job duties that qualify for an executive, administrative or professional (EAP) exemption as defined under the regulations.

In addition, according to ADP, employers may weigh the costs involved in raising employees’ salaries to meet the exemption criteria against the cost to reclassify them as nonexempt and pay them overtime when they work more than 40 hours per week.

Friedman says he would not be surprised to see employers creating more part-time positions so they can avoid characterizing individuals as full-timers subject to new rules. He warns that this could violate Employee Retirement Security Act (ERISA) Section 510 against interference of benefits. Taking such action could subject employers to lawsuits, just as it did when employers reduced employee hours to avoid being subject to the employer mandate of the Patient Protection and Affordable Care Act (ACA).

His firm is advising clients considering restructuring to act with caution. Get the appropriate legal advice. “Restructuring is not only employment-related but benefits-related,” Friedman stresses.

DeSilva notes that plan sponsors may rethink the definition of “compensation” in their plan documents to exclude overtime pay. Such decisions could potentially lead to plan amendments.

Assuming they do give overtime pay, plan sponsors may continue to match employee deferrals at their current match rate, or they may reduce their match rate to cut costs. “However, in the spirit of thinking about this holistically, they have to think that pulling back on [their] match would make them less attractive as an employer and upset participants,” DeSilva says.

 

ARE NONPROFITS AFFECTED BY THE OVERTIME RULES?
In guidance issued for nonprofits, the Department of Labor (DOL) notes that in order to be subject to minimum wage and overtime requirements, and to qualify for protections from the Fair Labor Standards Act (FLSA), employees must be “covered” by the FLSA. That coverage is usually achieved in one of two ways: The organization is a covered enterprise or a particular worker is individually covered. 
 
While many nonprofit organizations may not be covered enterprises, most nonprofits will likely have some employees who are covered and therefore entitled to the minimum wage and overtime protections the act guarantees, the DOL says.
 
Establishing that a white-collar employee is exempt from the FLSA’s minimum wage and overtime requirements involves assessing how that person is paid (the DOL’s salary basis test), how much he earns (the salary level test), and whether he primarily performs the kind of job duties Congress meant to exclude from the law’s overtime protections (the duties test).
 
Job titles never determine exempt status under the FLSA. Also, receiving a particular salary, alone, does not indicate that an employee is exempt from overtime and minimum wage protections.
 
However, to meet the enterprise coverage test—meaning that all employees working for that enterprise are covered by the FLSA’s protections unless an exemption applies—an entity must have annual revenues of at least $500,000. —RM

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