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by Elizabeth Livingston
Employers need to get ready—the American workforce is about to cost a lot more for big and small businesses alike. In response to a March 13, 2014 Memorandum from President Obama, the Department of Labor (DOL) has proposed changes to the Fair Labor Standards Act (FLSA) overtime regulations that are scheduled to be implemented later this year. The revisions will increase the overtime salary threshold for professional “white collar” workers from $23,660 to $50,440 and could impact as many as 5 million U.S. workers. The change primarily affects low level managers or clerical employees who have marginally more responsibilities than their overtime eligible co-workers. The changes are being implemented because certain salaried workers live barely over the poverty line, yet are expected to work 50-60 hours per week while remaining ineligible for overtime pay. The DOL has not decided whether this overtime salary threshold requirement will automatically increase as average salaries rise.

To understand how this might impact your business, you need to understand the distinction between exempt and non-exempt employees. Under the current “primary duty” test, this classification depends on the employees’ job description. Generally, exempt employees earn over $23,600 annually, have managerial or supervisory roles, and are not entitled to overtime pay. Non-exempt employees do not have those responsibilities, are paid hourly, but earn overtime pay at time and a half for hours worked in excess of 40 hours weekly. Because employers can also find it difficult to determine whether employees are exempt or not under the “primary duty” test, there is an ongoing discussion about whether that standard will be clarified.

Under the new regulations, exempt employees who are paid less than $50,440 annually will be entitled to overtime pay at time and a half when they work more than 40 hours per week. Businesses need to prepare for these changes by identifying exempt employees earning less than $50,440 and developing a plan for overtime compliance. Businesses need to assess the impact of either:
(1) raising salaries above $50,440 to avoid overtime obligations; or
(2) paying overtime for hours worked in excess of a 40 hour week.

For each employee, a business will need to assess what makes economic sense. Can the business afford to raise salaries now and to sustain those raises if the $50,440 threshold rises in the future, making the salary threshold requirement higher? Alternatively, if the company limits overtime work as a budgeting measure, could that impact the quality of client service and hurt the business in the long run? Faced with these difficult choices, a business could hire more part-time employees or outsource work to independent contractors. Each of these options, and the costs and consequences of them, must be assessed.

Savvy businesses need to inform employees no matter the route they take. In-person meetings followed by written materials documenting the changes and reasons for them are recommended. For hourly employees, the company must stress that all time should be recorded and employees will not be permitted to “volunteer” time to the company. It is important to convey that employee time is valuable and that employees are not expected or permitted to accept less money for the same amount of work. With the potential for increased employee costs, these are important issues to keep on your radar.

Elizabeth A. Livingston is a Senior Associate of Griesing Law, LLC, where she represents a wide range of clients from public and privately held corporations to government entities to small businesses and nonprofit organizations. You can reach her at (215) 501-7845 or elivingston@griesinglaw.com.

Published (and copyrighted) in Philly Biz, Volume 1, Issue 3 (February, 2016).
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