'To potentially reclassify so many employees, it is likely to have an impact on employee morale'
The Biden administration’s Department of Labor (DOL) has proposed a new rule that would make over three million “white collar” salaried workers eligible for overtime pay. The change, which could cost employers millions in increased employee costs, might take effect as early as mid-2024.
Under the Fair Labor Standards Act (FLSA), employers in the U.S. are required to pay employees who work over 40 hours per week a standard overtime rate of at least 1.5 times their regular wage.
The FLSA exempts salaried workers who work in a “bona fide executive, administrative, or professional capacity”; the rule known as the “white collar” or executive, administrative or professional (EAP) exemption.
Currently, salaried workers who make less than $684 per week are eligible for overtime. The DOL’s proposed change will raise that threshold to $1,059 per week or $55,068 annually – a jump that many employers will struggle to navigate, says Natalie Bare, employment law and class action litigator with Duane Morris.
White collar overtime rule will challenge employers
“Obviously this is going to have a major impact, because it's such a big jump, and so many employers are going to have budgetary constraints that are going to impact their ability to raise the salary of all of the affected employees to the new minimum level,” said Bare.
“Or at least they may not be able to do it for everyone. So many employees are going to need to be reclassified as non-exempt. There's a lot of different considerations for that, but that's the decision point for employers – are they going to raise salaries, or are they going to reclassify all or some of the affected employee population to non-exempt?”
A major consideration for HR professionals to consider is how to navigate communication and employee relations. Employees who are used to being paid salaries may balk against being moved to an hourly-paid basis, not only because of financial concerns but because of matters of identity and personal status.
Employers need to anticipate the nuances of different classes of employees within their companies, and how to best maneuver through the change.
“Many employees strongly value receiving a weekly salary,” said Bare. “Regardless of their hours worked, they may feel that being paid on a salary basis is a reflection of their importance at the organization, the importance of the position. To potentially reclassify so many employees, it is likely to have an impact on employee morale.”
Employers should be proactive about responding to Biden’s new overtime rule
To avoid negative reactions from employees, - it’s important for employers to be proactive and to start planning now for implementing the changes in their organizations. There is no “one size fits all” approach, she said.
In addition to the elevated threshold for lower-earning salaried workers, the DOL proposed a change to the highly compensated employee (HCE) threshold, from the current $107,432 annual rate to $143,988. According to the DOL’s proposal, this change is meant to guard against the unintended overtime exemption of employees who are not bona fide EAP employees, such as those in high-income industries or regions.
The DOL also proposed that the overtime threshold be updated automatically every three years, in order to account for fluctuations in the economy, which will further complicate things for HR, Bare says.
HR shouldn’t “wait and see” to put overtime strategy in place
Once the proposal is posted in the Federal Register, there will be a 60-day period for public comment, after which there will be another period of deliberation before it is made official. Bare predicts the rule could be in effect by mid-2024.
It also states that the rule updates can be paused as needed for 150-day comment periods.
Although there is uncertainty around when and if the proposed rule will come into effect, employers and HR should start detailed planning now, Bare said.
“It makes sense for employers to start immediately getting their arms around the affected employee population, at a minimum, and do some preliminary evaluation of their options and just sketch out a plan so they’re prepared, should a final rule be published.
“A wait and see approach may be tempting … but it's also equally possible that this kind of approach, a wait and see approach, could leave employers scrambling at the end to implement the changes.”