The DL on the new OT Rules

A new law dramatically expands overtime protection. Here’s how it affects your store.

October, 2016 —

In May, the Department of Labor issued its new overtime rules that go into effect December 1. There are two key components to the rule—one, the annual salary threshold skyrockets from $23,660 ($455 a week) to $47,476 ($913 a week). Two, this threshold will automatically increase every three years.

Before you panic, let’s breakdown what this means, which of your employees are affected, and what you need to do.

This rule applies to all employers, regardless of number of employees or average annual sales. There is no grace period or easing into this rule incrementally and it’s a final ruling from the Labor Department, so you can only imagine the repercussions of not complying (not to mention the possible civil suits). There are no changes to the standard duties test, which is how you determine if an employee is non-exempt or exempt. (See sidebar.)

All employees are eligible for overtime compensation unless they are paid a salary, that salary is more than the threshold ($47,476), and they qualify as exempt per the primary duties test. If they meet all three of these requirements they are not eligible for overtime.

Many furniture retailers compensate salespeople with some form of commission and/or bonus package. In these cases, up to 10 percent of the $47,476 salary may come from incentive payments or non-discretionary bonuses (a predetermined amount awarded based on meeting specific criteria). However, these payments have to be made at least quarterly.

Your first step is to identify which of your exempt employees are making less than $47,476 a year and decide if you need to raise their salaries to bring them up to the threshold or reclassify them as non-exempt.

If you do reclassify employees there are a number of variables to consider.

  • Will they make the same salary in an hourly format?
  • Will this include expected overtime or will the employee be able to earn OT?
  • Will their benefits change?
  • You’ll have to adhere to meal and hourly breaks, as well as any other labor laws specific to non-exempt employees.

Carefully weigh the pros and cons of reclassifying employees and make sure to clearly communicate any changes in compensation policies, overtime opportunities and expectations with your staff. Some exempt employees may feel as if they’re being demoted if they’re reclassified as non-exempt so it’s important to explain the new overtime rules and how they could negatively affect the business if these measures aren’t taken.

The Home Furnishings Association recently hosted a webinar presented by the U.S. Chamber of Commerce (HFA members can view this and all webinars on-demand through the member-only portal) during which Allison Dembeck, an executive director with the Chamber, outlined some of the issues with the new rules. These include: The new salary threshold is too high, especially for small businesses; only a portion of non-discretionary bonuses and commissions count toward the threshold; the annual automatic increase violates the Administrative Procedure Act; and there is no grace period or phased-in increase.

Realistically speaking, there’s no way to stop the rule. You must prepare now. There’s no legal avenue to pursue right now because the Labor Department has the authority to raise the threshold. When the first automatic increase goes into effect, there might be grounds for litigation because the department is bypassing procedures in automatically raising the threshold.

Congress could pass a joint resolution, but that would have to be signed by the President and that’s not going to happen under this administration.

There is House Resolution 5813, the Overtime Reform and Enhancement Act proposed by Congressman Kurt Schrader (D-Ore.). While this bill wouldn’t stop the rule, it offers a more realistic plan by phasing in to the $47,476 threshold over three more years ($35,984 this year, $39,780 in 2017, $43,628 in 2018 and $47,476 in 2019) and removing the automatic updates. It would require the Labor Department to go through a formal rule-making process for increases, which brings transparency to its actions.

The best course for employers is to be prepared to make the necessary changes by December 1 and, if this overtime rule will be a burden for your business, urge your Senators to introduce and co-sponsor a companion bill to H.R. 5813 and urge your Representatives to co-sponsor.

Employee Classifications

Duties Test
As you’re working to comply with the new overtime rules, this is a good time to take a close look at how your employees are classified. Paying someone a salary and calling them a manager does not automatically mean they fall under the exempt status. To be considered exempt an employee must meet duties tests as outlined by the Department of Labor. The duties tests have not changed under the new overtime rules. For each category, each test must be met.
Executive

  • The employee must be paid a salary not less than $913/week (starting December 1)
  • Their primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise
  • They must regularly direct the work of at least two or more other full-time employees or their equivalent
  • They must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative

  • The employee must be paid a salary not less than $913/week (starting December 1)
  • Their main duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and include the exercise of discretion and independent judgment with respect to matters of significance.

Professional

  • The employee must be paid a salary not less than $913/week (starting December 1)
  • Their primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.
  • The advanced knowledge must be in a field of science or learning and the knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

About the Author

Lisa Casinger
Lisa Casinger is the government relations liaison for HFA and the editorial director for RetailerNOW. Contact her at lcasinger@myhfa.org.