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The U.S. Labor Department has now made official something that has been in the works since 2014 – significant changes to the rules for determining which workers are eligible for overtime – changes that will be fraught with challenges for employers.

It has long been established under both state and federal wage and hour laws that an employer must pay an employee at least the minimum wage for every hour worked, and overtime (e.g., time and one-half) for all hours over 40 in a workweek if the employee is “non-exempt.” Generally speaking, entry to mid-level workers paid hourly are “non-exempt” employees. Mid to higher-level workers who meet specific requirements regarding their duties, and who are paid on a salary basis, are referred to as “exempt” employees. An employer is not required to pay overtime to such “exempt” workers.

The primary categories of exempt employees are “executive,” “administrative” and “professional” employees. In order to demonstrate that an individual employee is exempt under one of these categories, the employer must apply both a salary test and a duties test to the employee’s position. The salary test simply means that the employee must receive the same amount of pay each pay period, regardless of the number of hours they work. The duties test simply means that the employee’s job responsibilities meet certain criteria for the applicable exempt category, such as performing tasks that require the exercise of independent judgment and discretion.

The new rules recently implemented by the U.S Department of Labor dramatically affect only the “salary test” to determine whether an employee is exempt from overtime. Specifically, the most dramatic change in this regard, and one of the most ambitious attempts to establish new rights for American workers by the Obama Administration to date, raises the salary threshold necessary to classify workers as being exempt from the overtime rules by a whopping 100%, from $23,660 per year to $47,476 annually. What this means is that any worker who currently earns less than $47,476 will be entitled to time-and-a-half pay if they work more than 40 hours a week, regardless of what their duties are (i.e., whether their job is the most entry-level employee in any organization or the CEO).

Further, the new rule establishes a mechanism to allow the Labor Department to automatically update this salary threshold every three years, with the first update to occur on January 1, 2020. What this means is that every three years an employer will once again be forced to review the salaries paid to its workers who are classified as exempt from overtime, in order to ensure continual compliance with the salary thresholds, because such thresholds will likely increase with each automatic update.

The new rule also allows employers for the first time to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary threshold. Such payments may include guaranteed bonuses tied to productivity, but not any discretionary payments made to employees (such as end-of-year holiday bonuses) which are not directly tied to the employee’s own work output or performance and may be variable depending on employer’s profits or other business conditions.   The new rule does require that any such nondiscretionary bonuses and incentive payments must largely be paid on a quarterly or more frequent basis.

The new rule does not make any changes to the other component of establishing whether an employee is exempt, known as the “duties test.” That is, employers remain subject to the same rules that have been in place for a number of years regarding the duties that must be performed by an employee in order to be able to treat such an employee as exempt from the overtime requirements.  Therefore, assuming that employees were performing duties previously determined as “exempt,” the employer will not need to add responsibilities to any employee in order to continue their exempt status, as long as the new salary threshold is now met.

The rule change is expected to bring overtime rights to some 4.2 million workers currently excluded. It should also clarify eligibility for another 8.9 million workers whose status was unclear.

The White House said they pushed for this rule change in part because increases in the minimum wage have been blocked by Congress and in part because they wanted to make sure “middle-class jobs pay middle-class wages”. Meanwhile, Republicans in Congress and others who oppose the new rule, are preparing various ways to block, delay and/or rescind it before it ever takes effect, through both legislative means and litigation through the courts.   However, barring any success on these opposition fronts (which is not likely), these new rules will take effect on December 1, 2016.So, employers need to plan now to ensure that they will be compliance when the new regulations take effect.  What are the initial steps an employer should take to prepare for the changes? First, an employer needs to review the salaries of all current employees who are classified as exempt to determine whether those salaries are at or above $47,476 annually. Then, for those employees who do not meet the new salary threshold, the employer must choose among the following options to satisfy its compliance obligations:

1. Raise salaries: Employers may choose to raise the salaries of employees who meet the duties tests, but are not paid at the new salary threshold, in order to maintain their exempt status;
2. Re-classify as non-exempt: Employers may choose to re-classify the employee as non-exempt, if unwilling or unable to increase salary to the required threshold.

With respect to the latter option, in order to minimize the impact on employers of having to now be concerned about having to pay a re-classified exempt employee for working overtime hours, the employer can take various measures to ensure that overtime hours will not be worked, including by reorganizing workload distributions, adjusting employee schedules, spreading work hours, or adjusting wages (i.e., reallocating the employee’s current salary between regular wages and anticipated overtime wages so that the total amount paid remains largely the same).

If you are an employer and find yourself struggling to understand the laws regarding employee compensation, consider calling on the attorneys at Kainen, Escalera & McHale in Connecticut. We do one thing, and one thing alone – we are a Connecticut employer defense law firm – we work to protect and defend the interests of employers throughout the region. What’s more, each of our Connecticut attorneys has over 20 years of experience in employment and labor law matters and can provide your business with comprehensive legal counsel ranging from assistance with necessary preventive measures to trial advocacy. Please contact us if we can help you.

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