Exempt Status Rules Finalized

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By Ryan Glushkoff, Senior Director, Marketing

As a follow-up to my “Exempt from Sympathy” post, and in the name of “restoring and expanding access to the middle class”, the Department of Labor announced the FINAL rule changes to exempt status. The rule doubles the threshold at which executive, administrative and professional employees are exempt from overtime pay to $47,476 from the current $23,660. The change is expected to make 4.2 million additional workers eligible to receive time-and-a-half wages for each hour they put in beyond 40 a week.

As a quick historical recap, the rule was originally intended to exempt high-paid executives, but instead has had an unintended impact on limiting overtime for lower-level (and lower-compensated) employees who often work way more than 40 hours a week. The share of full-time workers who qualify for overtime has fallen from 62% in 1975 to 7% today, according to the government, and according to their estimates, the new rule, which would take effect December 1, 2016, would allow 35% of workers to qualify to overtime.

While the rule was originally proposed last summer, the government made some modifications in response to over 270,000 public comments. It lowered the new salary threshold to $47,476 from the originally proposed $50,544, and is allowing employers to apply bonuses and incentive payments to up to 10% of the new salary threshold. The threshold also will be updated every three years instead of annually, rising to $51,000 on January 1, 2020.

So, what does this mean? For employees, the upside is that they will be paid for the hours that they work. The upside for employees comes at the expense of employers who will have to pay their workers more for the same amount of work – either by increasing salaries or by paying overtime. Higher costs also come in the form of increased hiring. By reclassifying impacted team members as non-exempt, employers may hire additional resources to avoid paying overtime. It will add a training burden on employers as they will have to educate employees on changes, as well as institute new policies/procedures to minimize their overtime exposure. And finally, some companies may have to convert salaried workers to hourly employees who will then need to punch a clock and track their hours.

What’s the next big thing on the labor law horizon? In my opinion it’s the battle between 1099 and W2 workers, and the potential for the creation of a third class of worker. The current dual-classification scheme was born out of The New Deal in 1933 as a response to the Great Depression, and 83 years later, it’s time for an update to reflect an important byproduct of the sharing economy – people are becoming one person companies that work for multiple entities.

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