The New Overtime Rule Has Been Blocked. Now What?

My advice on what to do until a final decision is made.

Overtime, Office Binder on Wooden Desk. On the table colored pencils, pen, notebook paper

A federal judge in Texas gave something employers could be thankful for just a few days before Thanksgiving. On November 22, he issued a preliminary injunction on the Department of Labor’s (DOL) overtime rule change that was to go into affect on December 1. It came about from a lawsuit brought by 21 states challenging the DOL’s authority to raise the salary threshold. This was pretty big news for us HR folks. Huge news actually.

Many small organizations, however, didn’t even know the rule was going into effect. I was at a meeting a few weeks ago with a payroll provider who told me that the majority of their clients didn’t know about the new rule when asked about it. It would be safe to say that most managers and small business owners are too busy operating their organizations and don’t keep up on these types of things.

In order to bring these organizations up to date, the rule was supposed to double the Fair Labor Standards Act (FLSA) salary threshold for determining the exemption from overtime from $23,660 to $47,476. This is where we get the exempt and non-exempt employee classifications which I define in this post from my introduction to my series of the FLSA overtime classifications. In addition, it would also automatically adjust the threshold every three years based on the 40th percentile of the weekly earnings of full-time salaried workers in the lowest-wage Census region. The Society of Human Resource Management (SHRM) has publicly opposed the new rule as it will hurt nonprofits and smaller organizations and have a negative impact on workplace flexibility and employee morale.

It’s important to understand that the preliminary injunction is not permanent and that the current overtime rule will still be in effect. The court needs to review the merits of the new rule and issue a decision which could take several more months. The fact that an injunction was issued in the first place, makes me think the new rule is doomed.

For those organizations that didn’t know about the rule, they can just go on about their business and not worry about it until a final ruling is issued. For those businesses that knew about it and were making plans or already made plans to comply with the new rule, things may be a little more complicated and until we get a final ruling, here is my advice:

  • Fortunately, the injunction was issued on November 22, before the payroll period in which the December 1 deadline fell. I had advised my clients to make their changes effective Sunday, November 27, the first day of the payroll period. By following my advice (Because I’m so smart, LOL), the re-classification of their exempt employees to non-exempt can be postponed until that final decision is made.
  • If the organization already re-classified their exempt employees to non-exempt, the organization will need to evaluate how the decision was accepted by the impacted employees. Did they take it well or did they take it poorly? If they took it well, the organization would be wise to leave the re-classification in place. If they did not take it well, the organization might benefit by reversing the re-classifications but need to make it clear to the employees that it may be temporary until the final ruling is issued.
  • If the organization already increased (or announced an increase) their exempt employee’s salaries in order to maintain their exempt status, it would be wise leave those increases in place. There will be a great deal of confusion and a big hit on morale if they reverse this decision. An organization can certainly reverse their decision but it will be at the cost of employee goodwill and engagement.

It will be very interesting to see how this case will eventually turn out. As I said earlier, I think the new rule, as it is currently written, will never come to pass. I think the judge issued the injunction because he thinks the challenge by the 21 states has a very good chance of being successful.

However, for those who made plans to comply with the rule, don’t toss out all the work that was done in preparing for it as the court may still issue a decision in favor of the DOL. At the very least, I anticipate that the rule will be scaled back with more gradual and less extreme salary threshold increases.

For those who didn’t know about the rule and didn’t make plans to comply, they’ve been given a pass for the time being but need to be ready to address it if a final ruling is made in favor of the DOL or a scaled back rule is issued.

Introduction to FLSA Overtime Classifications

Image courtesy of shirophoto at FreeDigitalPhotos.net

Image courtesy of shirophoto at FreeDigitalPhotos.net

The Fair Labor Standards Act (FLSA) is a federal law that requires employers to pay overtime to employees. It was passed in 1938 and established the forty hour
work week, a national minimum wage, established prohibitions on employing minors, and guaranteed overtime pay of time and a half for certain jobs.

Today, I will focus on the guaranteed overtime provision and begin an exploration of the exempt and non-exempt pay classifications as a series of posts and podcasts.

Since this is the first post on the topic, I will just give a summary of the overtime provision and later will give more detail in future posts.

The FLSA requires most employers to pay employees who work more than 40 hours in a workweek a rate of one and one half times the employee’s regular rate of
pay. There are certain, well defined exceptions to this rule, however. Exceptions that I will begin discussing in today’s post.

The FLSA defines two classifications of employees – exempt and non-exempt. Exempt employees meet the FLSA’s requirements to be exempt from overtime pay while non-exempt employees are required to be paid overtime. There are several exemptions, or tests, that the FLSA provides in order to help employers determine whether an employee is exempt or non-exempt.

For most employees, their exempt or non-exempt classification status depends on how much they are paid (salary level test), how they are paid (salary basis test), and what kind of work they do (duties test). In order to be classified as exempt, the employee must pass all three tests.

Salary level test: Employees who are paid less than $23,000 per year or $455 per week are automatically non-exempt. Computer professionals are a little different and are non-exempt if they are paid less than $455 per week or $27.63 per hour if paid on an hourly basis. Note that the $27.63 per hour comes to $1,105.2 per week which is more than double the $455. I’m not sure why this is so at this point and hope to find out when I write the computer professional exemption post.

These numbers are current as of today’s writing but it looks like they will be increased sometime in 2015.

Salary basis test: All exempt employees must be paid a salary but must meet the minimum salary requirements listed in the salary level test above. In addition, the employee must meet all other requirements of whichever exemption classification applies to their situation.

In order to pass the salary basis test, the employee’s weekly salary must be paid without reductions in their pay resulting from variations in the quantity or quality of the work they performed. The employee must be paid for any week in which any time was worked even if they came in late or left work early during that week. Their pay cannot be deducted. Deducting wages would result in the employee losing the exempt classification.

The duties test: Now the potential exempt employee who meets the salary level test and the salary basis test must now pass the duties test. The exemptions the FLSA permits are typically high level jobs. The most common exemptions are executive, administrative, professional employees, computer professionals and outside sales employees. I will devote a separate post/podcasts on each of these exemptions in the future.

Exempt employees have very limited rights under the FLSA overtime rules. Pretty much all they are entitled to under the FLSA is to receive the full amount of the base salary in any work period in which they perform any work. The employer can require exempt employees to work any particular schedule, make up lost time due to absences, and work any amount of work time the employer requires on any schedule.

It is important to understand that a non-exempt employee cannot waive their FLSA rights. An employer cannot have an agreement with an employee to work extra hours over the 40 hour workweek in exchange for additional benefits, comp time, or additional pay instead of earning the required overtime pay. An employee who willingly goes along with or requests an illegal pay arrangement has the right to sue the employer for FLSA violations and recover any back pay they are owed under the law.

The Department of Labor’s (DOL) Wage and Hour Division (WHD) administers and enforces the FLSA. It will usually initiate an investigation in response to an employee’s complaint of an employer’s overtime practice. If there are multiple complaints, the WHD may launch a full scale investigation consisting of employee interviews and subpoenas of company records. If there is just one complaint, however, the WHD will typically conduct a phone interview and small scale investigation called “conciliation.” The WHD can also assess a penalty of up to $1,000 per violation for repeated or willful violations of the FLSA overtime provision.

Well that covers the introduction into the FLSA pay classifications. Next week, I will focus on the computer professionals classification because I want to find out why the required hourly rate of $27.63 is so high compared to the required weekly rate of $455 per week.

DOL Targets Extractive Industry – Where is HR?

Recently, the Department of Labor (DOL) has been targeting the extractive industry in its enforcement of the Fair Labor Standards Act (FLSA).  The result, large settlements.

Here is a list of some of the latest settlements:

Hutco – paid nearly $2 million in overtime back wages to 2,267 employees for mis-characterizing certain wages as per-diem payments and excluding these wages in their overtime calculations.

HongHua America – paid over $680,000 in overtime back wages to 133 roughnecks and crane operators who were improperly classified as independent contractors instead of employees.  Company paid them straight time for the hours they worked is excess of 40 in a week rather than time and a half they should have been paid.

Justiss Oil Co. – paid $619,830 in back wages to 270 employees for violating FLSA overtime and record keeping provisions by not paying workers for time spent at mandatory staff meetings at the beginning of the day and failing to record the time spent at the meetings.

Morco Geological – paid more than $595,000 in back wages to technicians for improperly classifying nonexempt employees as exempt and paid them a fixed daily rate regardless of how many actual hours they worked.

Savard Marine Services – paid $60,000 in overtime back wages to 107 employees for mis-characterizing certain wages as per-diem payments and excluded these wages in their overtime calculations.

Rigid Oilfield Services – paid $51,839 in overtime back wages to 28 employees who they improperly classified as independent contractors instead of employees.

The DOL’s initiative has resulted in $6.7 million in back wages being paid to 4,004 employees in the last fiscal year – Oct 1, 2012 through Sept. 30, 2013.

When I look through this list and the reasons for the settlements, I shake my head because its all HR 101 and could have easily been avoided.  Where are their HR Departments?  Do they even have one?  If so, where are they? Are they incompetent or are they just being ignored?  Regardless, these settlements should serve as confirmation that these companies should have an executive level HR position.  An HR professional at the executive level would have known that these practices are in violation of the FLSA and would have prevented them from happening.