A proposal to update overtime eligibility regulations would impact millions of workers. Because these proposed regulations could affect your business, keeping abreast of the latest developments will help influence your budget planning and long-term strategies.

Overview of FLSA

The Fair Labor Standards Act (FLSA) guarantees a minimum wage plus overtime at one and one-half times an employee’s regular rate for hours exceeding the 40-hour work week.

The U.S. Department of Labor allows exemptions when three tests are met:

1. Salary basis test
   The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
2. Salary level test
   The amount of salary paid must meet a minimum specified amount.
3. Duties test
   The employee’s job duties must primarily involve executive, administrative or professional (EAP) duties.

Overtime exemptions were meant to apply to highly compensated EAP employees. The issue is that the minimum salary specified in the salary level test has not been updated since 2004. The current minimum salary level is $455 per week or $23,660 per year, which means that positions such as convenience store manager and fast food assistant manager are ineligible for overtime pay.

New Proposed Overtime Rulings

President Obama signed an executive order in March, 2014 to modify the FLSA regulation in an effort to protect the middle class from losing overtime pay. On July 6, 2015, the Department of Labor responded with a Notice of Proposed Rulemaking (NPRM) to increase the salary level test requirement to $970 per week or $50,440 per year.

Additional changes under consideration include: Implementing a mechanism for automatic adjustments to the standard salary threshold; determining if non-discretionary bonuses should be taken into account; and deciding if the duties test should be modified.

Impact of Proposed Rulings on Employers

Doubling the salary threshold is expected to impact about 5 million Americans who are currently exempt, salaried employees. If the proposal becomes law, employers will be faced with daunting options: increase salaries of exempt employees to maintain their status or convert exempt employees to non-exempt status and pay them overtime. This adjustment could potentially cost businesses a significant amount of money, especially for the retail and restaurant industry.

Actions Employers Can Take

As a note of caution, before reducing employees’ pay, discretionary bonuses and hours, consider the fallout in terms of decreased morale and productivity. HR and Legal should collaborate to find a balance, formulate a plan and roll out well-crafted communications to employees before implementation. The challenge will be to reduce labor costs and stay competitive.

There is a 60-day comment period before the final rule is announced. The deadline is September 4, 2015. Comments may be mailed to the Department of Labor or submitted electronically through the Federal eRulemaking Portal. Through this site, background documents as well as published comments are available for public viewing. Your comments count!