The DOLs New Overtime Rules: What Retailers Need to Know

Labor is often the biggest item on retailers’ budgets, and it will likely be getting bigger. On May 18, 2016 the U.S. Department of Labor’s (DOL) long-anticipated overtime regulations were passed, updating the “Salary Basis Test,” which has, to date, allowed employers to exempt certain employees from overtime pay. As retailers wrestle with decisions about employee pay and communication following these new regulations, there are certain considerations they should bear in mind:
  • Employees who are classified as exempt under the Executive, Administrative and Professional (EAP) worker classifications must meet a higher salary level (the Salary Basis Test).  Specifically, in order for an employer to legally exempt an employee from overtime under the EAP worker classification, the employee must earn at least $47,476 annually or $913 per week (up from $23,660 or $455 per week under the old rules).  Note:  The rationale is that this sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, which is currently the South.
  • Employees who are classified as exempt under the Highly Compensated Employees (HCE) worker classification must earn at least $134,004 annually (up from $100,000 annually).
Retailers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. In order to qualify, these payments must be made at least on a quarterly basis. It’s important to note that discretionary bonuses and payments do not satisfy this requirement. However, employers will be allowed to make a “catch-up” payment in the event there is a shortfall in the non-discretionary bonus/incentive/payment in a given quarter so that they can still have their employees remain exempt. The employer has one pay period to make up for the shortfall (up to 10 percent of the minimum salary level required for the preceding 13-week period). The catch-up payment will only count toward the prior quarter’s salary amount, not toward the salary amount in the quarter in which it was paid.

Following a recent Restaurant CFO roundtable with labor attorneys Seth Briskin of Meyers, Roman, Friedberg & Lewis and Susan Rodgers of Buckingham, Doolittle & Burroughs, which took place before the overtime rules had been announced, my colleague, Adam Berebitsky published a blog post recapping the event. In it, he says that employers could convert salaried exempt employees to non-exempt hourly employees and pay them overtime. However, the employer should take care to develop a clear communication plan to help the employee understand why the change has been made and how he or she will be required to track hours. The employer will also need to determine whether such a conversion impacts employee benefits. For example, vacation benefits may be calculated differently for salaried exempt versus hourly employees.

For future planning, the DOL has also adopted a process for automatically updating the EAP and HCE salary levels every three years beginning on January 1, 2020.  Those amounts will be announced at least 150 days prior to the new rate taking effect.

Ahead of the new overtime regulation’s implementation of December 1, 2016, retailers should take the following steps to assess their current employment practices and develop a plan for managing new costs and complying with the new rules:
  • Review all positions (both job descriptions and pay levels) to determine if any are vulnerable to being reclassified as non-exempt based on the new regulations.
  • Determine whether to increase salaries/change job duties in instances where exempt status is in question.
  • Design communication strategies to explain to employees either why they are being reclassified to non-exempt (in order to mitigate morale problems) or why they are receiving pay increases.
  • Train managers and supervisors how to manage any changes in schedules, timekeeping, policies for reclassified employees.
  • Modify budgets as appropriate.