been about five months since
the Department of Labor's (DOL's) Wage and Hour
Division issued its proposed update on overtime
rules. Specifically, the agency has suggested
revisions to the definition of which employees are
exempt from overtime pay requirements and which are
not (referred to as the "white collar exemption").
proposal elicited 264,093 responses during the
two-month comment period. There's no way to know how
much, if any, of this feedback will find its way
into the final rules, which should go into effect
sometime next year. So it's prudent to plan ahead.
Duties vs. Titles
A key element of the proposal is to set the white
collar salary threshold at the 40th percentile
of "weekly earnings for full-time salaried workers."
The DOL estimated this would be $970/week ($50,440
annualized) in 2016 with annual adjustments for
inflation. That standard figure is more than double
what it is today, at $455 per week.
Even employees earning higher amounts would
generally be entitled to overtime pay unless they
also come under the "white collar exemption" for
jobs with "executive, administrative or professional
duties." But the DOL cautioned that, "Job titles do
not determine exempt status … for an exemption to
apply, an employee's specific job duties and salary
must meet all of the applicable requirements
provided in the Department's regulations."
In the proposal, the DOL also asked for comments on
whether the standard duties tests are working as
intended to screen out employees who aren't bona
fide "white collar exempt employees." So, be aware
that there could be changes to the job duties tests
coming in addition to any changes to the salary
Consider Your Options
What should you do now? While keeping in mind that
the final rules could be somewhat less aggressive
than the proposed ones, it's a good idea to have a
plan in place for dealing with the extra costs your
company may incur.
Start by reviewing your payroll and identifying
which nonexempt employees are paid above the current
$455 per week standard, but less than the projected
standard of $970 per week. Are any of them putting
in more than 40 hours a week? If so, you need to
Whether these jobs can be adjusted to reduce the
exposure you may have to paying time-and-a-half, and
How much your payroll will go up if the overtime
hours are unavoidable.
If you intend to adjust the duties of nonexempt
employees to avoid overtime pay, there are various
ways to handle the adjustment. You could, for
example, bring part-time help on board to work the
You could also "zero-base" each job. This means you
start from the ground up and rigorously review every
task that an employee handles. Is each job task
truly necessary, and is the amount of time the
employee takes to do each one justified?
Yet another possibility, at least on a temporary
basis, would be to judiciously reassign any "exempt"
(that is, executive, administrative or professional)
job tasks to a worker whose exempt status is beyond
question. But be careful not to overload exempt
employees, as doing so could diminish their
Is a Raise More Economical?
You might also analyze whether you'd save money by
giving raises to any nonexempt employees whose
earnings are close to the threshold. Doing so may
prevent these workers from becoming eligible for
For example, let's assume the proposed $970/week
threshold sticks. What would happen with employees
making $940/week for a 40 hour workweek while
working eight hours per week of overtime?
Answer: Their $940 weekly regular earnings would be
$23.50 per hour. In addition, they'd earn $282 in
overtime pay ($23.50 × 8 hours × 1.5), for total
earnings of $1,222.
Suppose, instead, that you raise these employees'
pay to exceed the $970/week standard by giving them
a $35/week raise. At $975/week, these workers would
be exempt from overtime pay. So their total
earnings, at $975/week, would represent a savings to
the company of $247/week.
In another calculation involving the same employees,
you could take the view that the nature of the job
really does require 48 hours per week, and the
workers are being paid appropriately. Therefore, you
could translate that to a lower hourly rate.
So instead of dividing earnings of $940 by 40 hours,
divide the earnings by 48 hours. That equals an
hourly rate of $19.58, which would be the rate you'd
use to calculate overtime pay.
Eight hours of overtime at $19.58, multiplied by
1.5, equals $235 in overtime pay. That, added to the
$940 in regular earnings, would equal $1,175 per
week. And if you raised the wages for those
employees above $970 but below $1,175, you'd still
come out ahead.
As noted, the $970 per week threshold was based on
an estimate of the 40th percentile of
salaried workers. The DOL could, in the face of
strong pushback by employer groups that have
severely criticized the proposal, change this
standard. The National Federation of Independent
Business, for example, predicted that the proposed
regulations would "have a substantial negative
impact on small employers and their employees."
There's always the chance that the DOL could
implement a lower threshold, for instance, the 35th or
30th percentile. Those would lower the
dollar limits to an estimated $852 and $773 per
week, respectively. But you can still apply the same
math principles to determine how much you'd have to
Whatever approach you decide to take when the final
regulations are out, communicate it clearly and
carefully to employees. Otherwise, depending on how
you proceed, workers may greatly overestimate the
overtime they could earn — potentially leading to
conflicts and a drastic drop in morale. An HR
professional can assist you with both the analysis
and planning for any required changes to your
For more information, please contact
Boris Benic, CPA,
or click here to email Boris.
He would be happy to address any questions you may