The State of the Revised FLSA Overtime Rule and How It Impacts Your Small Business

The State of the Revised FLSA Overtime Rule and How It Impacts Your Small Business

Change can be an incredibly stressful thing, especially in business. If the change is one you can anticipate and properly plan for, then this stress can be reduced. However, whenever there is any level of uncertainty around big changes, then this stress is compounded.

One of the biggest points of stress and uncertainty for businesses and business owners across the country right now stems from the revised FLSA overtime rule. We are going to explain the background of this revised rule, where the law currently stands, and what you need to be aware of as a small business owner. 

Background Information on the Revised FLSA Overtime Rule

The Revised Rule

The revised rule, according to the United States Department of Labor, “focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt,” and has three key provisions:

  1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker).
  2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004).
  3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

Legal Status of the Revised Rule

The revised FLSA overtime rule was originally set to go into effect on December 1st, 2016. However, this change was halted on November 22nd, 2016 when a federal judge in Texas, U.S. District Court Judge Amos Mazzant, granted a preliminary injunction that halted the new rule from being enforced.

On December 1st, the Department of Justice filed a notice to appeal the preliminary injunction, and were later granted a request for a 60-day extension until May 1st 2017  in which to file a reply brief.

This extension was requested in order to allow for the Department of Labor to transition to new leadership under the Trump administration, specifically the confirmation of  Alexander Acosta as Secretary of Labor, to see if the DOL will continue with its appeal or follow a different plan of action.
Acosta has not yet specified what direction the DOL will go regarding this litigation under his leadership, but there are potential outcomes small businesses should be aware of.

  • The DOL can continue with its appeal in hopes of lifting the injunction against the revised rule.
  • The DOL can choose to drop its appeal, which, in practice, would deem this version of a revised FLSA overtime rule dead. If this is the case, then it is likely that a new revised rule will be created with a lower salary threshold.
  • The DOL can drop its appeal and choose not to create a new revised rule in favor of keeping the existing rule. This seems unlikely, but is still a possibility.

Regardless of which route the DOL ends up going, it is likely that this process will take some time, so it will be important to continue paying attention to any updates as they happen, and act accordingly. 

How does this impact employers that already made changes in anticipation of the revised FLSA overtime rule going into effect, though?

What This Means for Employers

With the granting of this injunction taking place so shortly before the revised rule was set to take effect, many employers had already made the changes necessary to remain compliant. Now, those employers have seen these changes deemed unnecessary—for the time being, at least.

This has left many employers wondering what they should do now. Employers largely implemented two changes in order to remain compliant with the revised FLSA overtime rule before its original date of implementation on December 1st.

  1. Maintain Exempt Status:
    Increase pay of workers that met the previous salary requirement of $23,660/year and were classified as exempt to meet the revised salary requirement of $47,476/year in order to maintain the employees’ exempt status.
  2. Change to Non-Exempt Status:
    Reclassify previously exempt employees that do not meet the revised $47,476/year salary threshold as non-exempt.

Either of these options are potentially costly for employers, and have caused a great deal of headaches. Now, with the fate of the rule up in the air, many employers want to know if they are safe to make changes back to how they operated before the revised FLSA overtime rule was put in motion.

This is especially true for those who went the reclassification route, and now face a variety of new problems in their day-to-day operations. The most obvious of these issues comes from employees who would routinely work more than 40 hours/week under their previously-exempt status.

Now What?

Now, these employers have a difficult decision to make. They can either:

  • Continue having those employees work the same hours as before, and pay them at an increased overtime rate for any hours worked above 40/week.
  • Reduce the hours worked by those employees to less than 40/week in order to avoid paying the increased overtime rate.

The other large impact that reclassifying employees has had on employers has been the additional timekeeping infrastructure now required of them in order to accurately compensate their now non-exempt employees.

Conclusion

When it comes to employee classification and other compensation compliance headaches, a PEO is a great partner who can take these headaches away and help make these decisions more simple and strategic for employers.

In situations like this, where the situation is uncertain, it is essential to anticipate any change that may come and be properly prepared to act accordingly. A PEO can also help make situations where quick change and reclassification is required more painless.

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