The Obama Administration and the Department of Labor (DOL) enacted the “Overtime Final Rule” regulation 6 months ago, which was supposed to be effective as of December 1, 2016. However, in the recently consolidated pending cases Nevada v. U.S. Department of Labor and Plano Chamber of Commerce v. Perez, on November 22, 2016, the United States District Court, Eastern District of Texas enjoined enforcement of the Final Rule. The Court upheld the challenges against the Final Rule based on arguments in support of the 10th Amendment – limiting the power of the federal government over the states. It appears the DOL’s regulation will note be enforced as of December 1, however the ultimate outcome and the timing as to whether the Final Rule will be enforced is unknown. The uncertainty has several employers scrambling for immediate answers and for good reason.
By the Final Rule, 4.2 million workers nationwide currently not eligible for overtime pay will automatically qualify as “non-exempt” employees entitled to overtime pay. If effective, California employers will be required to align their policies with the Final Rule. This includes approximately 400,000 employees in California.
What Happens.
Previously, California employees who worked at a managerial or other executive level and were paid a base annual salary higher than $23,660 were exempt from overtime. The Final Rule establishes a bright-line divide between exempt and non-exempt employees by placing all employees making less than $47,476 annually or $913 per week into the non-exempt category – which means they are entitled to overtime. This is over a 200% jump from the standard salary set in 2004. Literally, any employee making under $22.85 per hour would be entitled to overtime regardless of his or her position.
Essentially, the Final Rule forces employers to either increase the gross salaries of all exempt employees making less than the new threshold, or in the alternative to ensure all employees under the threshold are paid overtime. However, it gets trickier. In California, if an employee works 9 hours in one day and 7 the next day, that employee is still likely entitled to an hour of overtime even if the work week balances at 40 hours – this depends on the “regularly scheduled” work week, and whether it is a 3 or 4 day work week rather than a 5 day work week.
What To Expect.
Employers were given a chance to change their overtime policies well in advance of the effective date of this new regulation. As the grace period ended, the District Court prolonged it – but for how long? As of today, employees who were not properly compensated would have had the right to sue for failure to pay overtime. Certainly, several attorneys are already searching for employers not currently in compliance with the Final Rule. If the regulation remains in effect, employers should be prepared to face widespread litigation – potentially class actions depending on the size of your company or quasi-class actions, such as Private Attorney General Act of 2004 (PAGA) complaints regardless of the company’s size. Employers not already adjusted for the upcoming overtime policy should monitor the recent developments knowing a potential tidal wave of lawsuits may come.
What To Do.
Employers used the “exempt” classification as an excuse to work its employees late-nights and on weekends, without keeping track of their hours. That luxury no longer exists. If an employee makes less than the threshold, an employer needs to have records to challenge an employee’s potential overtime claim. Employers should immediately implement a system to monitor the hours each employee works, whether it be enacting a policy prohibiting employees from working more than 8 hours in a day and 40 hours in a week, or requiring timesheets or clocking in-and-out.
Don’t subject your company to attorneys’ fees, statutory penalties, possible class actions and not to mention your own litigation costs. It’s simply not worth it. Keep track of your employees’ hours, and if your pay period begins before December 1, 2016, pro-rate the increase in salary or make sure you pay overtime.
Also, the recently enacted Labor Code Section 558.1 holds individuals liable for a company’s failure to pay overtime. These individuals include managing agents, owners, directors or officers. For more information on Section 558.1, stand-by for further analysis from Jeffrey F. Gersh.
Now What.
The far-reaching implications of the recent November 22, 2016 ruling by the District Court raises many concerns that cannot yet be answered, such as: If the rule is enforced, will it be retroactive as of December 1st? or, How are employers and employees affected if this ruling is appealed? or, What do employers do who have already promised overtime pay or an increase in salaries to its employees? or, Should I start paying overtime, to play it safe?
For help on complying with the Final Rule and following the developments of District Court’s decision, Jeffrey F. Gersh () at (818) 444-4500. Please note that nothing herein constitutes legal advice.
