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Overtime Rule Changes on the Horizon

May 18, 2016

According to a number of sources, the U.S. Department of Labor (DOL) may soon be updating its overtime regulations. These regulations govern which executive, administrative and professional employees (so-called "white-collar workers") are entitled to minimum wage and overtime pay protections under the Fair Labor Standards Act.

Current Rules
Employees subject to the overtime regulations must be paid at least one and one-half times their regular wage rate for any hours they work beyond 40 in a workweek. Currently, to be exempt from the overtime rules, an employee generally must meet all of the following:

  1. Be salaried, meaning they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
  2. Be paid at least a specific salary threshold, which is $455 per week (the equivalent of $23,660 annually).
  3. Primarily perform executive, administrative or professional duties (as defined in the regulations).

These guidelines have been in place since 2004.

Updated Salary Threshold
Proposed regulations issued last year would increase the salary threshold from $455 per week to $970 per week ($50,440 annually) and provide for annual inflation adjustments. However, while the amount is not verifiable, recent comments in the press suggest the DOL may lower the annual salary threshold to $47,000 for 2016, as a transitional measure. 

Regardless of the final amount, financial institutions will face a substantial increase in the minimum wage level at which employees are exempt from the overtime pay rules. Financial institutions relying on overtime to maintain customer service during certain times of the year may find many more employees need to be paid for their overtime hours.  

Illustration
Let's say a community bank has 10 of its salaried employees being paid at the equivalent hourly rate of $15. Due to their pay and job responsibilities, these employees have been exempt from the overtime rules. In 2016, after DOL's new rules become final, each employee works 100 hours of overtime and is compensated at the rate of $22.50 per overtime hour. This results in an additional salary cost to the bank for 2016 of $22,500. Assuming the additional overtime pay is subject to benefits equal to 10 percent of total compensation (primarily employer share of FICA and Medicare), the cost of the overtime for the 10 formerly overtime exempt employees rises an additional $2,250 to nearly $25,000. 

Get Ready
Financial institutions should prepare now for the issuance of the DOL's new overtime salary rules; many following the new rules activity expect them to take effect this summer. In addition to watching for the final rules, other steps to consider include:

  1. Analyze current pay rates for employees and overtime being worked to determine the potential financial impact of the increased overtime salary threshold.
  2. Review employee duties and responsibilities to determine the extent to which workloads can be balanced to minimize the need for employees working overtime.
  3. Discuss with HR personnel or consultants issues of employee morale and retention as compensation and job responsibilities are revised in response to the DOL's final rule. Employee meetings may be critical to explain new overtime policies and restrictions, if any, and adjustments to base pay.
  4. Ensure IT personnel or consultants are aware of the looming change and prepared to make the necessary programming changes.