- Start the preparation process. But don't put any changes into place before more is known regarding a final rule and any potential court challenges.
- Determine classification strategy. Decide whether employees in the “bubble” will be reclassified as non-exempt or receive a salary increase to the new threshold to remain exempt.
- Plan for logistical changes. Timekeeping strategies, tracking overtime hours and updating software as well as personnel changes such as new job descriptions or adjusted processes for employees unused to tracking time worked should be considered.
- Form a communication strategy. Manage communication to avoid issues with morale related to switching previously exempt employees to hourly status.
With the comment period open through Nov. 7 for the federally proposed overtime rule threshold increase, businesses should start preparing for changes now — but with some contingencies in mind.
The rule would increase the threshold at which most salaried employees are eligible for overtime from $35,568 to $55,068. It also would increase the minimum annual salary required to satisfy the Highly Compensated Employee (HCE) exemption from $107,432 to $143,988.
“Employers should begin preparing changes, but I wouldn't actually make any changes until we see what the final rule is,” said Lee Schreter, shareholder at Littler Mendelson P.C. “You have this window of time during the comment period and the period of time when the Department of Labor develops its final proposal, where employers can study this issue and think, 'If the final rule says the salary is $55,068, what does that mean for our business?'"
Conduct an Audit of Current Employment Structures
Employers can start by taking a look at which employees are exempt and non-exempt, and identifying who is in the “bubble” (with a salary between $35,568 and $55,068), meaning their status would change in some way with the new rule. Then, examine how much overtime is currently logged.
Conduct this audit, and subsequent steps, with the help of an employment attorney, and ensure any planning is completed under the auspices of attorney-client privilege.
“Employers should work with counsel to evaluate and implement any changes in response to the proposed rule, since the process of evaluating and changing practices and policies can create legal risks and discoverable records,” said Natalie Bare, a class action and employment law litigator for the Duane Morris law firm.
Confirm that employees meet all exemption requirements, not just salary levels. Now is a good time to make sure all workers are classified appropriately and to correct any errors.
Do the Math
For employees with salaries between the old and new thresholds, businesses will need to either increase their base pay to top the new threshold so that they will continue to be exempt, or reclassify them as non-exempt, meaning they now are eligible for overtime.
“In the first scenario, cost increases are directly related to higher base salary; in the second, cost increases will come from an increased number of employees entitled to overtime pay,” said Erika Johnson, director, work, rewards and career with WTW.
If employers choose to increase employees' salaries to continue classifying them as exempt, they should factor in the stipulation in the new rule that, if approved, would allow for an automatic review and increase of the overtime threshold every three years.
Increasing exempt employees' salaries to the new threshold may also necessitate similar pay increases for their peers or supervisors who already were above the threshold, to avoid pay compression.
Review state laws that may affect budget planning through the transition; for instance, California and New York use higher salary thresholds than those set in the proposed rule, Bare, of Duane Morris, said.
Adjust Systems and Procedures
If a business has more employees classified as non-exempt following this change, it's important to ensure timekeeping systems and processes are up to date, and that employees are trained on them if they previously were not tracking hours worked. Employees and managers also should be trained on how to control overtime expenditures and what constitutes hours worked, Johnson said.
Confirm that payroll, human resources and finance systems are up to date and prepared to manage the switch as well.
Make a Communication Plan
Don't overlook the importance of communicating a change management plan with employees, sharing procedural updates and keeping morale in mind.
“It is not uncommon for employees who were previously exempt but converted to hourly status to feel a certain level of disrespect or demotion,” said Neal Shah, a partner with the Frost Brown Todd law firm and a member of the firm's Labor and Employment team. “There is still a stigma around hourly work, and employers need to manage those perceptions.”
Additionally, be aware of state or local laws governing advance notice of wage changes, said Laurie DuChateau, who leads the U.S. Compliance Consulting Practice at HR and benefits consulting firm Buck.
Monitor the Final Ruling and Court Challenges
Although completing this preliminary work will help businesses transition smoothly if and when the overtime rule is changed, companies should not actually put the changes into effect until they are certain of final requirements. Even if the rule, or an adjusted rule, is put into place at the end of the 60-day comment period, there may be subsequent challenges to it in court.
A similarly significant increase was proposed during the Obama administration and ultimately did not go into effect, putting some businesses in a difficult spot because they already had put changes into place.
“Once an employer implements or communicates such changes, it is difficult to put that genie back in the bottle if the proposed rule is ultimately enjoined,” Shah said. “I would caution employers that this is just the first step in what will be a prolonged battle. It is important to start figuring out contingency plans, but the final answer has yet to be determined.”
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