Get ready, set…but wait…maybe not… As employers gear up to meet the swiftly approaching December 1, 2016, deadline to implement the Department of Labor’s (‘DOL”) new overtime pay requirements for white-collar workers, 21 states, the U.S. Chamber of Commerce, and several other business groups filed legal challenges in various courts to halt the changes The DOL’s Final Rule was specifically designed to raise the salary of low-wage workers who perform exempt work, and therefore, do not qualify to be paid for overtime. Although some welcome this amendment to the Fair Labor Standards Act (“FLSA”) for America’s workers, others believe the revisions basically ignore the type of work performed in favor of doubling the salary threshold for overtime exemption.  Although many employers are wondering if the filing of the new lawsuits will top the new rules from coming into force, they are advised to continue working diligently to adjust their business practices in order to ensure compliance with the law’s requirements until further notice.

The Final Rule

The FLSA exemptions, known as “white collar exemptions”  for executive, administrative, and professional employees, currently require that  an employee classified as exempted, must be paid  a base salary of $23,660 per year and perform particular types of tasks related to her or his primary job duties as identified in the statute. The Final Rule that goes into effect December 1, increases the salary level requirement to $47,476 per year, and increases the salary level for the highly compensated exemption from $100,000 per year to $134,004 per year.  Although the Final Rule nearly doubles the salary level, it also permits employers to satisfy the requirement through the payment of non-discretionary incentive compensation (up to 10 percent of the required salary amount).  The Final Rule, therefore takes the emphasis off an employer assessing whether an employee’s duties qualify her/him as exempt, but immediately focuses the question around whether an employee’s salary meets an established minimum level.

The Final Rule also includes, for the first time, an automatic indexing mandate that requires salary levels to be adjusted automatically, every three years, to account for gradual increases to the average salary levels for full-time employees. The automatic salary increase eliminates the need for individual rulemaking by the Department of Labor every time it seeks to increase the threshold, and assures that the salary thresholds are adequately updated over time.

Impact on Small Employers

As a result, an additional 4.2 million workers are expected to be eligible for overtime pay under the Final Rule. This will place a disproportionate financial burden on small businesses, which may force them to find new ways to work around the requirement, rather than increase pay.  The Final Rule affects about 44 percent of the 5.5 million U.S. businesses with fewer than 500 employees.  More than half of this substituent (3.2 million) employs 10 workers or fewer.

Larger employers with more resources and more institutional knowledge may find it less challenging to comply with the Final Rule, but all are grappling with massive administrative hurdles to be ready before the implementation period ends December 1. Small employers whose employee exempt status may be more fluid will also have issues as to which of their workers qualify for overtime based on the “white collar” exemptions.   Many will have to re-assess the weekly hours worked for all of their employees in order to determine how many of their previously exempt employees now qualify for overtime based on the Final Rule.

In order to account for the increased costs as a result of overtime pay, some have speculated that many small businesses may cut base pay or strictly limit employees to 40-hour work weeks, and bring in part-time workers to make up for lost productivity.

An Unclear Fate: Challenges to the Amended Rule

Despite the obvious benefit to workers who will now qualify for overtime pay under the Final Rule, many states are challenging the law, arguing that the Department of Labor overreached its authority by enacting these amendments to the Final Rule. The requirement doubling the minimum salary threshold and the introduction of an automatic indexing mechanism are the primary sources of the challengers’ grievance.

The plaintiffs argue that the increased minimum salary threshold disregards the requirement that an employee actually perform “white collar” duties in order to be exempt from overtime pay. They also challenge the automatic indexing mechanism, alleging that it increases the salary level every three years without regard for current economic conditions or the effect on resources, or the statutory language and legislative history suggesting no such mechanism was anticipated in the statute.  Lastly, the states argue that Final Rule is unconstitutional because it ultimately requires states to pay overtime to state employees based on a threshold determined by an executive branch of the federal government.

Although 21 states have joined together in bringing this lawsuit to challenge the Final Rule, many are not so sure they will succeed in obtaining a preliminary and permanent injunction declaring the Final Rule amendment unlawful. Essentially, the states are asking the judiciary to overturn a landmark Supreme Court decision Garcia v. San Antonio Transit Authority, which concluded that the 10th Amendment does not prevent Congress from forcing the states to comply with the FLSA.

In addition to the states’ lawsuit, the U.S. Chamber of Commerce, along with 50 other business groups, filed a separate lawsuit challenging the new requirements of the Final Rule.

Next Steps to Compliance

The Final Rule is slated to become effective December 1, 2016, so employers must determine how they are going to adjust their business practices to account for the re-classification of currently exempt employees whose salaries fall below the new threshold salary level.

For employees who earn pay near the new threshold salary level, and generally work more than 40 hours per week, it may be more fiscally practical for the employer to raise their salary past the threshold level rather than try to address the issue of potential overtime pay. Another option for the employer would be to decrease the worker’s base pay to offset costs from overtime expenses.  Both of these strategies would limit the financial impact of the Final Rule on the employer.

Alternatively, for employees earning pay well below the threshold level, re-classifying them as non-exempt and closely tracking their hours worked to limit them at or below a 40-hour work week would likely be the more practical option.

Employers may want to effect other changes, depending on the approach they take to respond to the new overtime rule requirements. For instance, some employers may have to install systems that monitor the working hours of employees who were previously exempt to overtime pay, but now qualify.  Additionally, employers may want to provide new employee training on time-recording policies that emphasize the importance of accurate time keeping to help ensure employers are complying with federal regulatory standards.

The remaining months of the implementation period provide employers with time to ensure that all employees are properly classified, based on the new overtime recruitments.