Preparing for the Proposed FLSA Overtime Regulations

The US Department of Labor (DOL) has proposed new regulations that would raise the minimum annual salary level for most employees exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) from $23,660 to $35,308.

Employers should begin preparing to comply with the new regulations as soon as possible, as they will likely involve time-consuming and potentially costly changes. The DOL projects that the new regulations will take effect in January 2020.

To prepare for the impact of the new overtime regulations, an employer should consider the following actions:

Identify Employees Who May Need to Be Reclassified

An employer should first determine which of its employees are currently classified as exempt under the executive, administrative, professional or computer employee exemptions (other than computer employees paid on an hourly basis) and currently earn less than the expected minimum salary of $35,308.

Highly compensated employees (HCEs) earning less than $147,414 in total compensation also should be identified.

Develop a New Compensation Plan for Reclassified Employees

The basic options for compensating employees who are currently classified as exempt but are paid less than the new minimum salary will be to:

  • Increase their weekly salary to the new minimum or higher to retain their exempt status; or
  • Reclassify them as nonexempt and:
  • Pay them overtime for any overtime hours worked;
  • Reduce or eliminate overtime hours; or
  • Reduce the amount of pay allocated to base salary and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant.

An employer should weigh not just the labor cost of each option, but also the potential administrative burdens, morale problems and litigation risks that could result from reclassifying exempt employees as nonexempt.

Consider Whether to Count Incentive Pay Toward the Minimum Salary Level

Under the proposed regulations, an employer will be allowed to count nondiscretionary bonuses, incentives and commissions to satisfy up to 10% of the $35,308.standard minimum salary level (but not the $147,414 minimum salary for highly compensated employees). So, for example, employees who draw an annual salary of about $32,000 and earn a $4,000 bonus could still be overtime-exempt.

When deciding whether to take advantage of this new provision, an employer should:

  • Understand the difference between discretionary and nondiscretionary bonuses;
  • Ensure that incentive pay is paid on an annual basis or more frequently; and
  • Prepare to include incentive pay in the regular rate of pay when calculating overtime;
  • Be ready to make catch-up payments to employees whose salary falls short of the minimum level when they fail to earn enough incentive pay.

Review Wage and Hour Policies and Processes

An employer should prepare to review and update its internal policies on:

  • Overtime;
  • Salary basis;
  • Meal breaks;
  • Rest breaks;
  • Telecommuting;
  • Timekeeping; and
  • Bonus eligibility.

Develop a Communication Plan

It will be essential to develop a communication plan to avoid the kind of confusion and misunderstandings that may lead to litigation.

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