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What lawyers need to know about the new overtime rule

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On December 1, the Department of Labor’s new overtime rule will go into effect. The change to the Fair Labor Standards Act will expand overtime protections to an estimated 4.2 million workers, of which over 330,000 are in Florida. The FLSA changes extend the overtime rule to cover those making less than $47,476 per year and removes some long-standing exemptions.

The specific exemptions that are affected are known as the “white collar” exemptions. They cover executive, administrative, professional, and computer-professional employees. Each category of exemption requires an employee to have certain duties (the duties test). In addition to having the required duties, the employee must also (with limited exceptions) be paid on a salary basis, with the salary meeting or exceeding a specified minimum amount (the salary test).

The new rule raises the minimum salary required to pass the salary test to at least $913 per week, or $47,476 annually. This is a major increase from the previous minimum annual salary level of $23,660 for exempt employees. The highly compensated employee exemption now requires a total annual compensation of at least $134,004. That exemption was previously set at $100,000.

The new rule does not directly impact the compensation of attorneys because lawyers fall under an exclusion in the professional exemption that does not require them to meet the salary basis test. However, others who work in law offices may be affected. For example, if a firm deems its office manager or network administrator exempt under the administrative exemption, it must ensure that the employee’s salary meets the new test.

As for other common law firm staff positions, the new rule may not have much impact, as neither legal assistants nor paralegals typically qualify for exemption under the administrative exemption. The duties test for that exemption requires the employee to exercise significant discretion and independent judgment, both of which are typically inconsistent with the ethical limitations on a paralegal or legal assistant’s ability to operate independently of a supervising attorney.

For others, however, the new rule will likely be a game-changer. Many firms have treated their managers as exempt under the executive exemption because they supervise two or more employees. These managers often work in excess of 40 hours per week to accomplish their duties. If those managers are currently paid less than $47,476 annually, these firms must now decide what to do with these managers.

An employer has several options to choose from and implement by December 1 to be in compliance with the new law. The first option is to raise the employee’s annual salary to at least $47,476. Up to 10 percent of this amount can be paid as nondiscretionary bonuses or incentive payments. Assuming the employee still satisfies the duties test, the employee will remain exempt from the overtime requirements.

The second option is to treat the employees as nonexempt. If this option is chosen, the simplest approach is to pay the employees hourly, and pay time-and-a-half for each hour worked beyond 40 in a workweek. Employers that choose this approach will likely try to set the employee’s hourly rate at a level that ensures that the anticipated amount of straight time and overtime earnings will approximate the employee’s previous salary.

A third option is called the fluctuating workweek. In this scenario the employee can be kept on a salaried basis, and the employer can simply pay overtime for each overtime hour worked. This strategy ensures that the employee still receives the same salary even when working less than 40 hours, but requires the employer to know the rules that govern the calculation of the overtime premium due for each overtime hour. If the employee is eligible to be paid under a fluctuating workweek pay plan, special rules may permit payment of a half-time premium, rather than time-and-a-half.

Finally, some employers may choose to alter the number of hours they schedule their employees to work. Instead of scheduling a single manager to work 50 hours a week, an employer might choose to schedule two part-time managers to work 25 hours each. By keeping the hours of each employee below 40, the employer does not trigger the overtime requirements. Of course, relying on part-time managers may result in a reduction in the competence or quality of the managers. This strategy also requires careful communication with employees and tracking of employee work hours. Even if an employer has a policy that forbids work in excess of 40 hours, the employer remains liable to pay for any work that it “suffers or permits.” Thus, if an employer is aware that an employee has worked more than 40 hours in a week due to inadvertence, emergency, or unanticipated circumstances, the employer must still pay the overtime even if that overtime is technically “in violation of policy.” Thus, scheduling employees to work 38 or 39 hours risks triggering overtime on the occasions when the employee works a few hours more than expected.

Employers must also be aware of common misconceptions about how hours of work are counted. To start with, each workweek must be treated separately; the employer may not average the hours worked during multiple weeks just because they fall within the same pay period. Furthermore, time spent in meetings or training sessions must usually be counted as hours of work. Likewise, travel between different worksites during the workday is compensable, although ordinary home-to-work or work-to-home travel at the start or end of a workday is not.

Overtime compensation remains an area that is frequently litigated, and mistakes can result in significant liability. Accordingly, employers should consult with an experienced employment law attorney to ensure that their pay practices pass muster, especially before significant rule changes like this one go into effect.

The new rule is itself designed to change every three years. The DOL website states that the new salary amount is set at “the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South,” and for highly compensated employees it is set at “the annual equivalent of the 90th percentile of full-time salaried workers nationally.” The minimum salary threshold for both of these categories will be revised every three years going forward, with the next update scheduled for January 1, 2020. For additional information, visit the Wage and Hour Division website or call 1-866-4USWAGE (1-866-487-9243).

For assistance with your firm’s operations or the compensation of your staff, contact PRI to speak with a practice management advisor. PRI can be reached from 8 a.m. to 5:30 p.m. Monday through Friday via telephone at 866-730-2020, email at [email protected], or live chat via the PRI website at www.floridabar.org/pri.

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