Complying with the DOL’s New Overtime Regulations

The Department of Labor (“DOL”) recently announced new overtime regulations, which will take effect on December 1, 2016. The new regulations increase the salary requirements for exempt employees, as the minimum salary will more than double from $23,660 to $47,476. The regulations provide for continuing increases of the minimum salary requirement every three years. This article provides an overview of the new overtime regulations, as well as guidance for how to comply and risks for failure to comply.

Understanding the Relationship Between State and Federal Law

The Fair Labor Standards Act (“FLSA”) is the federal law that establishes wage requirements, such as federal minimum wage and federal overtime rules. The DOL ensures compliance with the FLSA.

California’s Division of Labor Standards Enforcement (“DLSE”) ensures compliance with California wage laws, such as the California Labor Code and applicable Wage Orders. Restaurants are generally subject to Wage Order No. 5.

Ensuring compliance with federal, state, and local laws can be complicated. For example, the federal minimum wage is $7.25. However, California’s minimum wage is $10.00, and San Francisco’s minimum wage is $12.25 (increasing to $13.00 on July 1, 2016). If a San Francisco employer paid an employee $7.25, they would comply with federal law but violate state and local laws. Consequently, the general guidance is that an employer must follow the law that most benefits the employee. Applying that principle here, an employer should pay the highest required minimum wage, or $12.25.

Why is this important? In the past, California law was most beneficial to exempt employees because it required employers to pay a higher minimum salary than the salary required by Federal law. Specifically, California employers were required to pay exempt employees a salary of two times the state minimum wage, or $41,600.

However, the new DOL overtime regulations change this analysis. The new minimum salary of $47,476 is higher than current minimum salary required in California. In order to comply with federal, state, and local laws, employers must increase the minimum salary of exempt employees to at least $47,476 to comply with the new federal law.

Who is Exempt?

Non-exempt employees are individuals who are paid by the hour, and are entitled to receive overtime, double-time, meal periods, and rest breaks.

In contrast, exempt employees are individuals who work in positions classified as Executive, Administrative, or Professional. Exempt employees are paid a salary, and are generally not subject to overtime regulations.

In order to determine whether an employee is properly classified as exempt, employers are required to review the employee’s job duties and to comply with the minimum salary requirements known as the “Salary Test.” It is important to note that the new DOL regulations do not change the required duties for exempt employees. The new regulation only changes the Salary Test.

How to Prepare for December 1st

The new DOL regulations takes effect on December 1st. Employers are not required to change the salary of exempt employees until this effective date. However, preparing for the change now is important.

The first step is to identify your affected employees: (1) identify who is classified as exempt, and (2) determine what your exempt employees are currently earning. Once you have identified the employees who are subject to this new regulation, you can formulate a strategy.

There are two primary strategies:

  1. Increase the salary of exempt employees to meet the new minimum salary of $47,476. The new rate of pay needs to take effect no later than December 1st. The minimum salary will continue to increase every three years, so be prepared to conduct this same analysis again in the future.
  2. Re-classify these employees as non-exempt. Use the employee’s existing salary to determine an appropriate hourly rate that also accounts for occasional overtime. If you re-classify your exempt employees, ensure the employees understand they are eligible for overtime and double-time pay, and they must take meal periods and rest breaks.

In determining whether an employee meets the minimum salary, employers cannot include the cost of medical, disability, or life insurance benefits. However, an employer can include an employee’s bonuses and commissions up to 10 percent of the salary threshold, but only if the bonuses and commission are paid on at least a quarterly basis.

Risks for Failing to Comply

There are stiff penalties for failure to comply with the new DOL regulations. If an exempt employee is paid less than the minimum salary, then they are not properly classified as exempt. An employee who is not properly classified as exempt is entitled to overtime, double-time, meal periods and rest breaks.

As a practical matter, if an employer believed the employee was properly classified as exempt, the employer would not have paid overtime or double-time, and it is unlikely that the employee would have taken meal periods or rest breaks on a regular basis. The employer risks damages related to the failure to pay overtime wages, denial of meal periods and rest breaks, and associated penalties, liquidated damages, and interest.

In calculating the overtime wages and penalties, a court will use the employee’s salary to determine their average hourly rate. This calculation can result in a shockingly high hourly rate and overtime rate. For example, an employee who earns $41,600 per year earns the equivalent of $20.00 per hour. A court could apply an overtime rate of $30.00, and would likely award damages for all overtime hours worked. A manager who works 60 hours per week would be entitled to 20 hours of overtime per week, or $600. For a one-year period, potential damages just for the overtime claim would amount to $31,200. Moreover, most salaried employees do not clock in or out, so there may not be a clear record of how many overtime hours the employee actually worked. The lack of records can make it difficult to defend these claims.

The message is clear – now is the time for employers to develop a strategy for compliance with the new DOL regulations.

Marie Trimble Holvick is a partner in the Employment and Retail & Hospitality practice groups at the San Francisco office of Gordon & Rees. Ms. Holvick regularly provides counseling and litigation services to Bay Area restaurants. Ms. Holvick’s experience includes handling DOL and DLSE claims, class action wage and hour litigation, and claims for discrimination, harassment, retaliation, whistle-blower retaliation, and wrongful termination. Ms. Holvick also assists with workers compensation and ADA access claims. If you have any questions, you can reach Ms. Holvick at mholvick@gordonrees.com, or 415-875-4242. 

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