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November 30, 2015
How To

Are you ready for the new federal overtime rules?

As many businesses know, the U.S. Department of Labor (DOL) recently proposed rule changes to the "white collar" overtime exemptions under the Fair Labor Standards Act and invited comments from interested parties.

The proposal would raise the minimum salary required for these exemptions to the 40th percentile of earnings for full-time employees — currently $921 per week ($47,892 annually), but could be $970 per week ($50,440 annually) by the time the final rule is issued in 2016.

This increase would be a substantial jump from the current weekly salary minimum of $455 and would have a disproportionate economic effect on businesses in Maine, where salaries are not as high as the urban centers on which the 40th percentile standard is based. The proposed new rule also would provide for automatic updates to the minimum salary levels annually. If annual updating is included in the final rules, it could mean businesses would have to increase exempt employees' salaries each year to maintain the exemption.

As many businesses also know, to be exempt from overtime requirements, an exempt employee must not only meet minimum salary requirements but also must meet certain duties tests under the separate executive, administrative and professional exemptions. The DOL did not propose any specific changes to the relevant duties tests in its proposed rule. Instead, it sought input from interested parties during the comment period to determine whether it should also make changes to the duties tests.

The comment period ended on Sept. 4 and garnered close to 250,000 responses. The DOL must now review those comments before issuing its final revised rule, which is anticipated sometime in 2016. Although it remains to be seen how much the DOL will increase the weekly minimum salary required to meet the overtime exemptions, and whether it will make changes to the duties tests to impose additional burdens on meeting the relevant exemptions, the DOL likely will make some salary increases and employers must be prepared.

So what does this mean for businesses in Maine?

For starters, it means that you may need to pay currently exempt executive, administrative and professional employees more — maybe substantially more — to maintain their current exempt status and avoid the requirement to pay overtime. If you are considering the effect of these changes on long-range planning, you might want to project, for now, that the minimum salary will start at or near $50,000 and could move up steadily from there. It is noteworthy that the proposed new rule may permit employers to count some level of commission payments toward the minimum salary requirement.

If the proposed higher salary threshold is too burdensome, you may want to consider reclassifying your exempt employees as non-exempt employees entitled to overtime. Such a reclassification could, of course, have a negative effect on employee morale due to the perception of a demotion, reduced benefits and flexibility and loss of opportunities for incentive pay. Because of these negatives and others, you may want to reclassify employees as non-exempt but continue to pay them on a salary basis. There are benefits to paying non-exempt employees on a salary basis if you are able to meet what is known as the fluctuating work week test. Whether you continue to pay new non-exempt employees on a salary basis or an hourly basis, you will need to pay overtime if such an employee works more than 40 hours in a work week. It would be important in either case to manage overtime hours to realize a cost benefit in this approach. The proposed changes also represent a good opportunity to review and, if necessary, bolster the current exempt status of your employees and even consider some alternative payment plans.

Don't be caught unprepared. The changes are coming, so planning now and understanding your options will help you to meet these new challenges head on.

Eric Uhl, a shareholder in the Portland law office of Littler Mendelson, can be reached at euhl@littler.com

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