The Department of Labor's Changes to Overtime Rules for 2016 and Beyond
By being proactive, employers can get ahead of the game and limit their exposure.
Each year the number of wage and hour lawsuits grows. According to the latest statistics released by the Administrative Office of the U.S. Courts, there were approximately 8,781 Fair Labor Standards Act (FLSA) cases filed in 2015 — a 7.6-percent increase over 2014. Since 2000, the number of wage and hour filings in federal court has increased by more than 450 percent.
Employers also paid approximately $400 million in 2014 alone to settle wage and hour lawsuits, with an average payment of $5.3 million per employer, according to the consulting firm NERCA Economic Consulting. Employers have paid over $3.6 billion since 2007 to settle wage and hour lawsuits.
Today, wage and hour lawsuits represent the largest category of employment-related class action filings. No single factor has driven this rise. However, the economic downturn coupled with an anemic recovery, and an overall increase in class action lawsuits have all helped.
To top it off, the Department of Labor (DOL) revamped the “white collar” exemptions test, more than doubling the minimum salary threshold for exempt employees. The DOL is expected to issue final regulations sometime in 2016, and it’s estimated that the upcoming changes will affect roughly 4.7 million workers, if not more.
When the changes become effective, employers can expect greater scrutiny and a further increase in wage and hour lawsuits. Therefore, it’s important for employers to understand the upcoming changes to the overtime rules and to begin preparing now.
Wage and Hour Law
The federal FLSA, passed in 1938, guarantees a minimum wage to almost all employees and requires overtime when employees work more than 40 hours in any workweek. There are, however, several exemptions. Employees exempt from overtime requirements under federal law most often fall under one (or more) of four “white collar” exemptions: executive, administrative, professional, and computer employees.
Under the FLSA, in order to classify a position as exempt, generally that position must pass both a salary test and a duties test. Currently, the salary test requires a weekly salary of $455 per week ($23,660 per year). The duties test depends upon the exemption, but typically includes: directing and supervising the work of others; the authority to hire, fire, and promote; exercising independent judgment and discretion; or advanced knowledge in a field.
Under the announced exemption revisions, the DOL has proposed raising the salary test from $455 per week to $970 per week ($50,440 per year). In other words, the DOL is planning to more than double the minimum salary for exempt employees.
The DOL has also proposed raising the salary threshold each year, based upon some unspecified economic indicator.
The last time the DOL changed the standards for exempt employees in 2004, the number of wage and hour lawsuits increased. There were 3,617 FLSA cases filed in 2004, 4,039 in 2005, 4,207 in 2006, and a jump to 7,310 in 2007. The pattern is alarming at best. Consequently, now is a good time to take steps to limit any potential exposure.
Employers have various options for compliance with the new rules. They could simply raise all exempt employees’ wages to at least $50,440 per year. Obviously, this “solution” will be unworkable for many employers. Conversely, employers could simply reclassify every exempt employee making less than $50,440 per year as non-exempt. Once again, this “solution” will also be unworkable in many instances. The appropriate solution will depend upon your company’s specific operations and situation, and there’s no silver bullet solution.
Employers could also explore alternative methods to help limit the impact of the new regulations, such as the fluctuating work week schedule or moving employees to non-exempt salaried status. However, before making any changes, employers should ensure that they are complying with both state and federal law, which often have different requirements. And employers should remember that alternative arrangements, other than traditional non-exempt or exempt status, often lead to inadvertent violations of the FLSA.
Whatever steps a company chooses to take to address the problem, clear communication with affected employees will be paramount. Employees who are reclassified as non-exempt will require a clear explanation why, as well as an explanation of new requirements, such as keeping track of their time. In addition, some employees may need to be let go and some jobs may need to be restructured.
Employers should not wait until the final rule is released to begin this process. The company-wide review and subsequent decision-making will take time. Ensuring adequate time to make the best informed decision for your company will be important.
Wage and hour complaints have become the most commonplace employment-based lawsuits, and a change in the law frequently results in an increase in lawsuits filed. By being proactive, understanding the new rules, and taking action now, employers can get ahead of the game and limit their exposure.