This past spring, the Department of Labor (DOL) issued a final rule updating overtime regulations under the Fair Labor Standards Act (FLSA).
According to a DOL FAQ document, when the final rule takes effect on December 1, 2016, the “standard” salary level for employees eligible to receive overtime pay will increase to $913 per week (equivalent to $47,476 annually for a full-year worker), up from $455 per week ($23,660 annually). The total annual compensation requirement for highly compensated employees to be eligible for overtime pay will increase to $134,004 per year, up from $100,000 per year. These levels will update automatically every three years, beginning on January 1, 2020, to maintain the earnings percentiles set in the final rule.
A post from ADP notes that any exempt employee who earns greater than the threshold amount under the new rule may remain exempt from overtime pay if that person primarily performs executive, administrative or professional duties as described in the regulations.
The DOL says, as a result of the new rule, absent employer action, an estimated 4.2 million white collar workers will become newly entitled to overtime protection because of the increase in the salary level. As a result, many of these workers will be able to work fewer hours, will receive additional compensation when they work overtime, or will receive a salary increase to remain exempt. In addition, the final rule clarifies the overtime requirements for 8.9 million currently overtime-eligible salaried employees, 5.7 million salaried white collar employees and 3.2 million salaried blue collar employees because their pay will fall below the new threshold and no assessment of their duties, which can result in misclassification, will be necessary. An estimated 732,000 white collar, salaried workers making between $455 and $913 per week do not meet the duties test and are already overtime eligible, but their employers do not recognize them as such.
The DOL estimates that average annualized direct employer costs will total approximately $295 million per year over the first ten years, including regulatory familiarization costs, adjustment costs, and managerial costs. But, the overtime rules will not only increase employers’ compensation costs. It will increase costs for retirement plan benefits, and may have other effects.
NEXT: Effects on retirement plans
Steven J. Friedman, shareholder at Littler Mendelson in New York City, notes that the new overtime rule will have an effect on retirement plan sponsors that are providing match contributions on employee deferrals or other employer contributions based on employee compensation levels.
Joe DeSilva, senior vice president/general manager of ADP Retirement Services in Forum Park, New Jersey, says the additional costs for plan sponsors depends on what the plan document defines as compensation. “Plan sponsors have the opportunity to select whether to include overtime compensation,” he tells PLANSPONSOR. “In our book of business, the vast majority do. I think the additional cost will be somewhat sizeable.”
Friedman says, “It would appear from first blush that it would help plan sponsors with nondiscrimination testing rather than hurt them.” That is, if the non-highly compensated employees are deferring more compensation because they are receiving more pay.
But, DeSilva says it could go either way. “With the increase in overtime levels for highly compensated employees, there could be an issue with nondiscrimination testing. More deferrals from the non-highly compensated could help plan sponsors pass the testing, but more deferrals from highly compensated employees could cause them to fail the testing,” he points out.
NEXT: Actions plan sponsors may take
As the DOL says, as a result of the new rule, absent employer action, an estimated 4.2 million white collar workers will become newly entitled to overtime protection because of the increase in the salary level.
To what employer action is the DOL referring? Employers who do not want to pay current exempt employees at the new salary threshold, may consider reclassifying them as non-exempt. Employees could also maintain exemption status if they are paid on a salary basis that meets the new threshold and they continue to perform job duties that qualify for an executive, administrative or professional exemption as defined under the regulations. In addition, according to ADP, employers may weigh the costs of raising employees’ salaries to meet the exemption criteria against what it would cost to reclassify them as non-exempt and pay them overtime when they work more than 40 hours per week.
Friedman says he wouldn’t be surprised to see employers creating more part-time positions so they can avoid characterizing individuals as full-timers who would be subject to new rules. He warns that this could violate Employee Retirement Security Act (ERISA) Section 510 against interference of benefits. This could subject employers to lawsuits, just as it did when employers decided to reduce employee hours to avoid being subject to the employer mandate of the Affordable Care Act (ACA).
His firm is advising clients considering restructuring to act with extreme caution. Get the appropriate legal advice. “Restructuring is not only employment-related but benefits-related,” Friedman says.
DeSilva noted that plan sponsors may rethink the definition of compensation in their plan documents to not include overtime pay. It could potentially lead to plan amendments.
In addition, assuming they include overtime pay, plan sponsors may continue to match employee deferrals at their current match rate, or they can reduce their match rate to cut costs. “However, in the spirit of thinking about this holistically, they have to think that pulling back on match would make them less attractive as an employer and upset participants.”
NEXT: Are nonprofits affected by the overtime rules?
In guidance issued for nonprofits, the DOL notes that in order to be subject to minimum wage and overtime requirements and qualify for the FLSA’s protections, employees must be “covered” by the FLSA. Coverage under the FLSA is usually achieved in one of two ways: the organization is a covered enterprise; or a particular worker is individually covered.
While many nonprofit organizations may not be covered enterprises under the FLSA, most non-profits are likely to have some employees who are covered individually and are therefore entitled to the minimum wage and overtime protections guaranteed by the FLSA, the DOL says.
Establishing that a white collar employee is exempt from the FLSA’s minimum wage and overtime requirements involves assessing how the employee is paid (salary basis test), how much the employee earns (salary level test), and whether the employee primarily performs the kind of job duties that Congress meant to exclude from the law’s overtime protections (duties test). Job titles never determine exempt status under the FLSA. Additionally, receiving a particular salary, alone, does not indicate that an employee is exempt from overtime and minimum wage protections.
However, to meet the enterprise coverage test, meaning that all employees working for that enterprise are covered by the FLSA’s protections unless an exemption applies, an entity must have annual revenues―volume of sales made or business done―of at least $500,000. The DOL notes that as a general matter, non-profit organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities that result in sales made or business done that meet the $500,000 threshold. Ordinary commercial activities are activities such as operating a business, like a gift shop. Activities that are charitable in nature, however, are not considered ordinary commercial activities, and do not establish enterprise coverage.
More information about determining whether a nonprofit is subject to the new rules is here.