October 25, 2016 Mapping Out Your Compliance Game Plan for the New Overtime Rules

To comply with the new regulations, employers have a choice to make with their employees who are currently classified as exempt: 1) raise their salaries to keep them exempt (and thus not eligible for overtime) or 2) reclassify them as non-exempt and pay them overtime. The DOL estimates that these regulations will result in millions more employees eligible for overtime. So what does all this mean for the automotive industry? Although these new regulations are (by and large) not industry-specific, they impact a massive number of employees in the automotive industry. The head-in-the-sand defense will not work. Let’s map out a compliance strategy before it’s too late.

The Salary Goalposts Have Moved—and Will Continue to Move

The minimum annual salary level to qualify for the “white collar” exemptions has increased from $23,660 to $47,476. So, employers will have to pay employees currently classified as exempt at least $47,476 (i.e., $913 per week) to maintain their exempt status, or convert those employees to hourly and pay them overtime for all hours worked over 40 in a workweek.

The DOL will also increase the minimum salary levels for “white collar” exemptions every three years based on a scale that uses the 40th percentile of all full-time salaried workers in the lowest-wage Census Region (currently the South) in the prior year’s second quarter. The DOL will also adjust the minimum salary level for the highly-compensated exemption to the 90th percentile of all full-time salaried workers nationally, which will also be based upon the Current Population Survey’s prior year’s second quarter. In other words, employers will have to contend with new minimum salary levels every three years to maintain their employees’ exemption status.

Preparing For Change—Time is of the Essence as the Deadline Nears

The first step toward compliance is to pull compensation data and identify each employee your organization has classified as exempt under the white collar exemptions and is currently paid under the minimum annual salary threshold of $47,476 (or under $134,004 for the highly-compensated employee test). These will likely include many in the automotive industry—such as frontline supervisors, analysts, bookkeepers, coordinators, etc.

Once all the impacted employees are identified, you will need to consider a number of factors before making the decision whether to increase salaries or pay overtime. First, of course, is whether the company can afford to pay the impacted employees the difference between their existing salaries and the new minimum salary threshold of $47,476. If not, the reclassification decision is easy, but that does not end the inquiry. Critically, how many hours are these employees typically working in a workweek? Depending on the new compensation structure for these employees, it may actually cost more in overtime premium payments per year than it would to just pay the difference between their current salary and the new minimum salary of $47,476. Determining the number of hours worked may be a challenging task in and of itself, as many employers do not keep time records for their exempt employees (since they’re not required to). Nevertheless, this data will be critical in making an informed decision.

Next, what will the new compensation structures look like for the impacted employees? Here, employers have a number of options, but many traps await the unwary. One particularly effective approach to mitigating the impact of converting salaried employees to hourly (from both a company budget perspective and from an employee wage stability perspective), is the cost-neutral approach, which converts the former salary into an hourly rate. The formula is as follows: (current weekly salary) / (40 + (average number of overtime hours worked X 1.5)) = cost-neutral hourly rate.

Additionally, the company will need to seriously consider if the reclassification of an employee from exempt to non-exempt status will cause a workplace morale issue, as many employees perceive their exempt status as a sign of professional development.

Next, if the company decides to pay the impacted employees enough to meet the new salary level to maintain their exempt classification, the company will want to ensure they actually meet the duties test of the particular “white collar” exemption, if any are applicable. Remember, simply paying the new minimum salary is not sufficient to maintain the exemption—the company will have to make sure the employee is actually performing exempt work. This is an ideal time to conduct a job audit to determine if any positions are misclassified.

Additionally, the company will want to consider if the salary raises for these employees will create any pay equity issues (e.g., long-time frontline supervisor Steve who makes over the minimum salary level might wonder why the new frontline supervisor is making the same amount). Will this create a ripple effect where the company may need to adjust other salaries accordingly?

Post-Reclassification Decision

After the reclassification decisions have been made, the company will need to determine the best way to deliver the message (and the best messenger for the delivery) and certainly be prepared to answer a host of frequently asked questions (e.g., Why now? How will this impact my pay? Should I have always been paid overtime? Do I have to clock-in now? What about my benefits?). Next, the company will want to ensure these newly reclassified non-exempt employees are trained on the company’s wage and hour policies (e.g., no off-the-clock work, recording all hours worked, etc.) and make any necessary revisions or updates. Additionally, the company will likely need to retrain those managers who will now (perhaps for the first time in a long time) be managing non-exempt employees.

Preparing for the new overtime rules requires thoughtful and deliberate planning in order to strategically minimize its impact and reduce potential liability. If you have not begun the planning process—now is most certainly the time to start – do not wait until a DOL investigator knocks on the company door after December 1.

Chris Anderson

Chris is a shareholder in the Nashville office of Littler Mendelson and counsels business clients on general employment matters. He can be reached at chrisanderson@littler.com.

Roger Scruggs

Roger is an associate in the Nashville office of Littler Mendelson and represents employers in a variety of areas, including wage and hour, discrimination and independent contractor status. He can be reached at rscruggs@littler.com.

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