Employers Mull OT Rule Compliance Strategy Despite Legal Déjà Vu

Employers preparing to comply with the US Labor Department’s new expansion of overtime protections are fearing another round of legal whiplash if the rule—which is almost certain to be challenged in court—is blocked or paused.

The last time the DOL sought such a large increase to overtime eligibility in 2016, federal courts blocked the rule eight days before it was set to go into effect, and after many businesses had already implemented pay and staffing changes to be in compliance with the new policy.

That same concern is lingering over the DOL’s latest rule to raise the threshold under which workers are owed overtime pay for certain “white collar” workers under the Fair Labor Standards Act, with little time before the rule’s first implementation date of July 1.

Businesses will likely face two options: raise the salary of their employees so they remain exempt, or make necessary staffing adjustments to avoid employees working overtime.

“We could end up in the same situation we did last time where employers were getting themselves into compliance and then the rule was stayed,” said Lisa Schreter, a shareholder at the management-side firm Littler Mendelson P.C. “And that certainly seems like it could be a very distinct possibility here.”

The rule issued by the DOL in April would make it so “executive, administrative, professional and outside sales” employees making less than $58,656 would be automatically owed time-and-a-half pay when they work more than 40 hours a week, a significant raise from the current level of $35,568 that is estimated to provide more than 4 million workers with new overtime protections.

“This is a huge change for a lot of employers,” said Stacey Chiu, senior associate at management-side firm Michelman & Robinson’s Los Angeles office, noting that the threshold is set to increase by nearly 70%. “So that’s going to capture a lot of employees who were previously exempt.”

But despite predictions that the rule may be sidelined in court, employers will likely enact the changes anyway to avoid any potential legal risk, management-side attorneys and worker advocates say, and should be making those tweaks soon.

“Employers do have a lot of compliance options they need to evaluate relative to their economic and cultural impact on the business,” said Andrew Spital, chair of Willkie Farr & Gallagher’s employment litigation and counseling practice. “You really don’t want to be making these decisions last minute.”

Salary Adjustments

In order for “white collar” workers to be exempt from overtime pay under the FLSA, the DOL uses a three-part test that requires an employee to be salaried, make more than a certain amount per year, and have certain job duties.

The new Biden rule released last month will increase the salary piece of that test to $43,888 on July 1, which is expected to make 1 million workers newly eligible for overtime. Another 3 million workers are expected to be included when the salary threshold goes up again on Jan. 1 to $58,656. After that increase, the threshold will update every three years based on economic data.

But the paperwork review needed for employers to decide how they want to comply with the rule, like bumping up a worker’s pay or just adjusting their scheduling, as well as the actual payroll reprogramming that may be needed, isn’t cut and dry, attorneys say.

And both choices pose their own recordkeeping obligations or staffing limitations.

“If you’re used to texting your exempt employee at random hours to check in on tasks or assignments, or having exempt employees answer emails with clients during not regular work hours, all of that would have to then be recorded if they’re non exempt. And all of that would be compensable time,” Chiu said.

On the flip side, providing raises to keep employees exempt also poses a “huge” financial burden for employers, she said.

Changes to individual salaries can also have “impacts further downstream” for people who may be above that pay level, cautioned Schreter.

For example, employers that use pay bands for their salary decisions may have to make adjustments to their full compensation structure, because they “have suddenly now narrowed” at least at one level of their pay ladder with the new exemption threshold.

With just weeks to prepare, employers need to “begin the process of looking at the impact of this rule on their workforce, so that they can begin gathering the data to allow them to make the decision,” she added.

Worker Benefits

The adjustments made by employers to comply with the rule are expected to result in $1.5 billion in income being transferred from employers to workers annually, the Biden administration estimates.

That figure includes higher wages due to overtime pay as well as employers who increase salaries so they can continue to keep their workers exempt.

But those changes will benefit workers in a number of ways beyond just taking home more cash, including by driving hiring and pulling some workers off the sidelines, said Judy Conti, director of government affairs at the National Employment Law Project, a think tank that supports the new overtime update.

“There’s so many people in this country who are involuntarily working part time hours, especially in retail, food service, and the hospitality industry, and those folks are probably going to get more hours as employers look to better manage their overtime costs,” Conti said. “Some of those part-timers are going to get full-time jobs, and there will be places where brand new jobs are created altogether.”