Human Resources News & Insights

DOL issues new OT rules: What you need to know, what they’ll cost

The wait is finally over. The DOL just released its proposed revisions to the FLSA overtime exemption rules. Now you can start prepping for the fallout, which will be dramatic. 

For months, the DOL’s been teasing us with promises that the proposed rule changes would be revealed soon. Labor Secretary Thomas Perez even joked the agency was “working overtime” to get the revisions on the table.

Well, all the speculation came to a screeching halt on Monday, when a President Obama-bylined column was published by The Huffington Post, providing a sneak peek at the rules. Hours later, the official Notice of Proposed Rulemaking was available on the DOL’s website.

We’ve gathered the pertinent facts from the 295-page long notice here for you.

Here’s what you need to know:

  • The new pay threshold is much higher than anticipated. As you know, the current minimum salary a worker has to be paid to be exempt from overtime is $455 per week or $23,660 per year. Well, under the proposed rules, it would jump to $970 a week or $50,440 per year. That’s significantly higher than the $42,000 mark those on Capitol Hill had been teasing. The DOL calculated that $50,440 would equal the 40% percentile of weekly earnings for full-time salaried workers.
  • The highly compensated employee threshold will also climb. The total annual compensation requirement needed to exempt highly compensated employees would climb to $122,148 from 100,000 — or the 90th percentile of salaried workers’ weekly earnings.
  • The salary thresholds will automatically increase. For the first time ever the salary thresholds will be tied to an automatic-escalator. The DOL is proposing using one of two different methodologies to do this — either keeping the levels chained to the 40th and 90th percentiles of earnings, or adjusting the amounts based on changes in inflation by tying them to the Consumer Price Index.
  • No changes to the duties tests have been proposed. The DOL hasn’t suggested changing the executive, administrative, professional, computer or outside sales duties tests (see them here) as of yet. However, the agency is seeking comments on whether they should be changed and whether they’re working to screen out employees who are not bona fide white collar exempt employees. Early indicators were that the DOL would look to adopt a California-style rule in which employees would be required to spend more than 50% of their time performing exempt duties to be classified as exempt.
  • Bonuses aren’t part of the salary calculation. As of now, the DOL says nondiscretionary bonuses won’t count toward a person’s salary — but that could change depending on the comments the agency receives. Currently, such bonuses are only included in calculating total compensation under the highly compensated employee test. That’s not set to change. But the DOL said some stakeholders are asking for broader inclusion of bonuses in salary calculations.
  • The rules will — most likely — take effect in 2016. We don’t have a definitive timeline for implementation of the rule changes, but it’s a safe bet they won’t kick in until at least 2016. The proposed rules haven’t been published in the Federal Register yet. But once they are, an official public comment period will be set. The DOL will then review the comments and make changes to the proposed rules if it’s deemed necessary. At that point, the rules will be re-released in their final form, and an effective date will be announced.

How many people will be affected?

Based on the Obama Administration’s calculations, only about 8% of workers currently earn less than the existing $23,660 salary threshold. And as the numbers above indicate, cranking the threshold up to $50,440 would put about 40% of workers under the line. According to the DOL, that would extend overtime eligibility to about 4.6 million workers, assuming employers did nothing in reaction to the rule changes.

The White House has also provided a chart of just how many workers in each state would be affected by the rule changes — again, assuming employers stood pat.

How much will it cost?

Now for the cost to employers: The DOL is estimating that the average annualized direct employer costs will total between $239.6 million and $255.3 million per year, depending on the salary threshold auto-escalation method.

In addition to direct costs, the DOL says the rules would transfer between $1.18 billion and $1.27 billion out of employers’ coffers into employees’ paychecks annually — again assuming employers do nothing to adjust to the rules.

As we reported previously, Oxford Economics, a global analytics, forecasting and advisory firm, is predicting that transfer of funds won’t take place. Its researchers believe businesses are likely to make “significant adjustments in the structure of their workplaces to compensate for the billions of dollars of added wages the new regulations would impose.”

Oxford Economics predicts employers will “adjust compensation schemes to ensure they do not absorb additional labor costs.”

To do this, the firm estimates employers would:

  • lower hourly rates of pay
  • cut employee bonuses and benefits so they can increase base salaries above the new threshold, and
  • reduce some workers’ hours to fewer than 40 per week in order to avoid paying overtime.

All of these actions would leave total pay largely unchanged.

But taking these actions would result in exorbitant administrative costs — far outweighing the DOL’s estimates, according to Oxford Economics.

In its report, commissioned by the National Retail Federation, Oxford Economics estimated that raising the salary threshold to $51,000 would cost businesses $874 million in administrative expenditures alone.

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