New Federal Overtime Rule Is on the Books

Get ready, employers. After two years of grim anticipation, worry, and debate, the new federal overtime rules are on the books as of May 23, 2016. Softening the blow is that the Department of Labor has made a few compromises after listening to employers’ concerns, and has extended the final compliance date to December 1, 2016.

Overtime Rule

In any case, the new overtime regulations will have a marked effect on the hospitality industry, which has the lion’s share of jobs affected by this overtime rule. After December 1, the minimum $23,660 yearly salary ($455 a week) for exempted employees will double.

Provisions of the new overtime rule

What got hospitality industry leaders’ attention was the original DOL proposal was to raise the salary threshold to $50,440 to exempt an employee from overtime pay. After some geographical percentile tweaking, the DOL lowered the threshold somewhat to $47,476 ($913 a week). Automatic salary updates will occur every three years, which will most likely extend the threshold to beyond $50,000.

The biggest concession for hospitality industry employers concerns bonuses and other incentives, including commissions. The new overtime rule permits employers to include up to 10 percent of the $47,476 salary level as part of the employee’s overall compensation. Thus, those incentives could bump the employee into overtime-exempt status.

Back to basics

It all goes back to the Fair Labor Standards Act (FLSA), which, effective July 24, 2009, established a federal minimum wage of not less than $7.25 per hour. Overtime pay for non-exempt employees must be at a rate of not less than 1.5 times the regular rate of pay after 40 hours of work in the workweek. Typical exemptions to the law are executive, administrative, professional, and outside sales employees, and a variety of other categories recognized by the DOL.

Again, the hospitality industry appears to have been a major target of the new rule. For example, a fast food restaurant assistant manager paid $455 a week could spend 60 to 70 hours a week on the job. Duties could include supervisory and managerial work, along with the same work as other hourly employees. Divide the assistant manager’s salary by the number of actual hours, and that employee might not average much more than an hourly worker.

What hospitality industry employers need to do now

Effective December 1, 2016, employees receiving less than $913 per week are considered non-exempt from the overtime rule. Those receiving at least that amount, and who fall within the approved DOL categories, may be classified as exempt. Formerly exempt employees who do not meet the new salary and category criteria must be reclassified and be paid for their overtime work.

The next step for employers is to compare the costs of raising employee salaries to meet the higher exemption criteria against the cost of just paying them overtime. So, it boils down to two options:

1. Raise currently exempt employees’ salaries so they keep their exempt status. Along with this option, it would be wise to review the employees’ duties to ensure they qualify for continuing exemptions.

2. Reclassify existing exempt employees to non-exempt. When an employee’s salary level does not meet the new exempt requirement, follow this advice and reclassify the employee as non-exempt.

Caution: For option number 2, overtime payment rules will kick in, and the employer has the onus to ensure the employee never voluntarily or involuntarily works past the 40-hour limit without overtime pay. Read more on the law’s provision and how to avoid federal sanctions on the DOL elaws Employment Law Guide web page.

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