New Overtime Rules on the Horizon?

The rules for overtime pay are again under the microscope. Proposed rules introduced during Obama administration created quite an uproar among employers — not surprisingly, considered that they were expected to make more than 4 million salaried workers newly eligible for overtime. A federal district court judge halted those rules days before they were due to take effect.

The existing rules haven’t been updated since 2004, though. Now the Trump administration is taking a swing at revising them, issuing a proposed rule that would make about 1.3 million “white-collar” employees currently exempt from overtime nonexempt. The proposed rule wouldn’t only potentially increase your compensation and administrative expenses; it also could hike your payroll tax liability.

Here’s what you need to know about how things could change — and what you can do to prepare.

Current Rules

Under the 2004 regulations, an employer generally can’t classify a white-collar employee as exempt from overtime requirements unless he or she satisfies three tests:

  1. Salary basis test. The employee is paid a predetermined and fixed salary not subject to reduction due to variations in the quality or quantity of the work performed.
  2. Salary level test. The employee is paid at least $455 per week (or $23,660 annually).
  3. Duties test. The employee primarily performs executive, administrative, or professional duties.

The current rule also provide a less restrictive duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $100,000 (including commissions, nondiscretionary bonuses and other nondiscretionary compensation) and at least $455 salary per week. This makes it easier for them to qualify as exempt.

At first glance, you might think the HCE provisions aren’t particularly relevant to community association management companies, but that’s not necessarily the case. “I’ve seen arrangements where, if the community saves a certain amount of money in expenses, its manager gets some sort of bonus,” says Russell Landy, a partner in the Miami boutique law firm Damian &Valori LLP. A manager who earns enough of those bonuses could pass the HCE salary level threshold and be exempt.

Proposed Rules

The proposed rule would raise the standard salary level threshold to $679 per week (or $35,308 annually) for the executive, administrative, and professional exemptions. It also increases the total annual compensation requirement for HCEs to $147,414 — a big jump over the current level, which likely would result in more overtime-eligible HCEs.

HCEs would need to earn at least $679 per week on a salary or fee basis, not counting more than 10% of annual or more frequent nondiscretionary bonuses and incentive payments. The rule would allow employers to make a catch-up payment to employees who don’t earn enough in nondiscretionary bonus or incentive payments in a given 52-week period to meet the HCE salary threshold and retain his or her exempt status.

Duties Matter

The proposed rule wouldn’t change the job duties test, so it’s not surprising that much of the focus after the rule’s release has been on the higher standard salary level. Salary is merely one part of the equation, though. “Above that salary level, eligibility for overtime still varies according to the employee’s job duties,” points out Steven Braten, a partner in the West Palm Beach, Fla., law firm Rosenbaum PLLC who works with community associations. 

An employee’s salary and job title alone can’t justify an exemption — in other words, you can’t avoid overtime obligations simply by labeling someone who earns above the threshold a manager. The employee’s specific job duties also must satisfy the requirements for either the executive, administrative or professional exemption. And those criteria can trip you up.

The executive exemption, for example, generally won’t apply unless the employee manages at least two full-time employees and has a say in hiring and firing, among other things. The administrative exemption includes a requirement that the employee primarily perform office or non-manual work, as well as one that he or she exercise discretion and independent judgment “with respect to matters of significance.”

That might pose a problem for firms whose managers are often out in the field and may perform extensive manual work. “There could be some question as to whether an on-site manager — versus an off-site manager who stays in the management company’s office — will satisfy the job duties test,” Braten says. “They might be doing more physical, hands-on work that might not pass the job duties test.”

Salary-Related Strategies

If you have employees who meet the job duties test and sometimes work more than 40 hours per week, you should start thinking about how you can reduce the impact to your bottom line.

Among the options? Raising the salaries of employees whose pay is near the proposed salary level. “Management companies should do the analysis to see if it’s cheaper to increase the salary than to leave them at their current rate but end up paying overtime,” Braten says. Alternatively, Landy says, “you increase the pay rate but reduce the number of hours, so it’s a wash for the employee but doesn’t create an OT issue.”

Landy cautions that salary adjustments could trigger other legal liabilities. “To the extent you change pay rates to work with new requirements, you need to make sure you don’t inadvertently discriminate against a protected class.”

Instead of boosting pay, you might juggle workload distributions or adjust employee schedules to redistribute work hours in excess of 40 among current staff.  You also could hire new employees to reduce or eliminate overtime hours.

Whatever your strategy, Landy says confusion is likely during the transition period, on both the employer and the employee sides. “You need to be careful that an employee who expresses concern about pay doesn’t suffer any adverse employment action that could open you up to a retaliation claim,” he says. “Even if the employee is wrong, you need to treat him or her fairly.”

Finally, you can expect a greater administrative burden if the proposed rule is finalized. “You’ll have a whole bunch of recordkeeping requirements for some employees that you didn’t have before,” Landy says. “You’re going to need to record hours worked and in and out times, and keep those in a way that can’t be modified unless both the employer and the employees agree — for example, if an employee just forgot to clock out one day.”

Stay Tuned

The U.S. Department of Labor has indicated it expects the finalized rule to take effect on January 1, 2020, but that’s not written in stone. “The last time a new rule was on deck, we got to the 11th hour before the court struck it down, and a lot of employers had already made changes,” Landy says. He advises monitoring the developments closely and seeking legal counsel to help you achieve compliance while also controlling your costs.