Employers should start thinking about how changes in the tests for the federal overtime exemptions will affect their payroll costs and compensation plans.  An employee must meet both a salary test (meaning that they are paid a salary, currently at least $455 per week) and a duties test to qualify for the exemptions (except for certain professionals).

I recently attended a meeting of the Wage-Hour Defense Institute, a nationwide group of lawyers with expertise in the Fair Labor Standards Act.  Several important points were discussed.

The Department of Labor sent proposed regulations revising the white-collar exemptions to overtime to the Office of Management and Budget for review prior to publication in the Federal Register.  It is expected that they will be published before June 21, 2015.  Once they are published there will be a notice and comment period before the regulations go into effect, but there will not necessarily be a long delay before the effective date.

No one outside the government has seen the new regulations, but DOL watchers expect it to double the salary test to around $900 per week.  At $900 per week ($46,800 per year) many supervisory and administrative jobs will cease to qualify for the overtime exemption.

DOL watchers also expect the DOL to rewrite the primary duty test to make it more difficult for employees to qualify for exemption, by requiring that exempt employees spent at least 50 percent of their time on exempt work.

Employers that are forced to reclassify employees as non-exempt will face important decisions.

In some instances, it may be cost effective to increase employees’ pay and responsibilities to qualify them under the revised test.

Employees who are reclassified as non-exempt can be converted to an hourly rate, in which case the employer will have to decide how to factor in anticipated overtime costs without creating the impression that they are cutting employees’ base pay.  Non-exempt employees can also remain on salary, in which case they can be paid half-time for overtime worked under the fluctuating workweek method (which assumes that the salary covers straight-time for all hours worked – including overtime hours), although that method is not available in all states and comes with a number of complications.

Employers will have to train newly non-exempt employees who are not used to reporting their hours to do so, and decide how to handle issues such as travel time and time spent on phone calls and emails outside the office.

Reclassifying employees as non-exempt may also affect whether they are covered by collective bargaining agreements and their participation in employee benefits plans.

Employers can also use the new regulations as an opportunity to correct existing misclassifications.  In some instances, employers have not corrected problematic misclassifications for fear of attracting a lawsuit.  The new regulations will provide an explanation for reclassification without necessarily suggesting that employees were misclassified in the past (and are thereby entitled to back pay).