The New DOL Overtime RegulationsWho is covered and how to plan for the new rules

Background on the rules• Fair Labor Standards Act passed during the Great Depression• Defines “exempt” (not covered) and “non-exempt” (covered)

employees• 3 criteria for assessing “exempt” vs “non-exempt” employees

• How are they paid – hourly v salary• How much are they paid• What are their job duties

What enterprises are covered by the new rules?• If state law uses federal rules – is true for Illinois• If have more than $500,000 in commercial activity – applies to a

business and commercial activities (not fundraising) for nonprofit

• If have one or more employees who are regularly engaged in interstate commerce• Includes interstate phone calls• Ordering supplies from out of state businesses

• If state law is different, use the stricter standard

Present Rules – Until December 1, 2016• Non-exempt employees – is covered by the Fair Labor Standards

Act• Weekly wage - $455 per week maximum for most non-exempt

employees• Was last changed in 2004• Note that the salary test is per week.• Duties do not involve executive decision making authority

New Rules – starting December 1, 2016

• Rules on duties did not change• Minimum weekly wage for “non-exempt” employees was raised

to $913 per week. • Equals $47,476 annually.• Includes bonuses and commissions paid quarterly or less often. • Consider adjusting bonuses so paid quarterly instead of

annually• Can’t count an annual bonus

How the Rules Work• You must pay at least 90% of the weekly wage, or $821.70.• If total salary is less than $11,869 in the quarter, you must

make up the difference in the first pay period o f the next quarter.

• Is based on the 40th percentile of the full time non-hourly paid employees in the lowest paid census region (South). But defined the south to include Washington DC, Virginia and Maryland.

• What if employee leaves in the middle of the quarter?

A Comparison of the Changes

2004 2016

Duties testProfessional,

administrative are exempt

No change

Salary basis Salary-exempt No change

Salary amount $23,660 $47,476

What employees are covered (non-exempt)• Those who are paid hourly• Those who work in certain industries• Those who are paid less than a certain salary. • Those whose jobs do not involve discretionary or executive

decision making or professional training • It is possible for salaried employees to be paid overtime.

What is included in addition to salary?

• Nondiscretionary bonuses • Incentive pay• Commissions • Must be paid at least quarterly• Can cover up to 10% of the required amount

Which employees are exempt?• White collar exemption – middle and upper level managers• Professionals – lawyers, doctors, CPAs• Professionals and executives must be paid a salary• There was no change in this from previous rules

Highly Compensated Employees

• Currently at $100,000 annual compensation• Goes to $134,004 starting December 1.• Is set at the 90th percentile of full-time non-hourly paid

employees nationwide

Future Automatic Increases• Salary levels will increase automatically every 3 years starting

January 1, 2020.• DOL will provide notice of the new levels at least 150 days

before the January 1 effective date.• This means that we will get notice approximately July 1 of the

preceding year• Don’t count on levels ever going down

How Do You Prepare for the Changes?

• START PLANNING NOW! IT WILL TAKE SEVERAL WEEKS OR MONTHS TO WORK THROUGH THESE RECOMMENDATIONS.

• Rules will not go away. They become effective before the next administration and Congress take office

• Somebody is likely to file a lawsuit against the new rules, but it will take a long time to wind through the courts.

• Lawsuits under the FLSA are increasing. These lawsuits start with disgruntled employees.

How will the rules affect your employees?

• Look at independent contractors to make sure they aren’t employees.

• Many organizations come down on the wrong side of the issue• Identify employees who need to be reclassified (exempt or non-

exempt)• These include jobs below the new salary threshold• We recommend that you review duties also. Don’t rely on job

titles.• You have a chance to correct misclassification with reduced risk

of litigation.

How much will overtime cost you?

• Collect salary and incentive pay information• Calculate the cost of increasing the salary to $47,476• Should you reduce incentive pay to offset the salary increase?• What is the cost of overtime?

• How many hours are currently exempt employees working? • Formula: (weekly salary / 40) x 1.5 x expected overtime hours

A Legal Cost Neutral Solution• Weekly salary/(40+(OT hours * 1.5))• With a good estimate of expected weekly work hours (average),

applying this formula will result in same weekly and annual compensation

Sample Calculations

Required weekly salary

Present weekly salary Standard hours Hourly rate

Overtime factor

Expected overtime hours

Average weekly cost

Cost of raising the salary $913 $800 $113 $18.26

Cost of overtime $800 40 $20 1.5 10 $300 $22.00

Cost neutral solution $913 $800 40 $23 1.5 10 $166 $19.32

How To Review Jobs• Do it with your organization’s attorney. If plaintiff’s lawyer

comes calling, it will be privileged information. • Review job descriptions, training materials and performance

expectations• Ask for a legal analysis if job duties qualify for an exemption

How To Pay Reclassified Employees?

• Pay on a salary or convert them to hourly pay?• Adjust the salary level downward or adopt an hourly rate that

will minimize the additional costs?• How do you calculate overtime for salaried employees?

• Divide salary by 40?• Divide salary by actual hours worked?• Fluctuating workweek?

• Do we still provide incentive pay?• Should we change any benefits?

Some practical considerations• Comp time – illegal to give covered employees comp time• How will employees feel about punching a clock – you need to

discuss how your employees may feel about punching a time clock.

• Employees may consider it a demotion.• Don’t rely on a job title to decide. Look at their actual

responsibilities • Employees cannot “volunteer” the additional hours. Is illegal

Do we change any Policies and Procedures?

• Policies• Off the clock work• Meal and rest breaks• Travel time• Bringing your own devices?

• Procedures• Timekeeping• Payroll changes• Controlling overtime

Communication and Training• Need to communicate with management as well as the

employees• The important decisions

• Who will communicate?• What will you communicate?• How will you communicate?• When will you communicate?

• Prepare a FAQ sheet to handout.• Train employees and their managers on the new policies and

procedures

Analyze how the rules will affect you• How will it affect your budget when the new rules take effect?• Where will the money come from?

• Program cuts• Reduced labor force• Additional sales – not easy in present economy• Additional fundraising for nonprofits – also not easy in present

economy

Contact InformationFor more information contact:

James C Provenza, JD, CPAJames C Provenza & Associates, PC1701 E Lake Avenue, #407Glenview, IL 60025Phone: 847-729-3939Cell: 815-298-0664E-mail: jprovenza@provenzalaw.com