REPORT FROM THE U.S.—The U.S. Department of Labor has released its new overtime rule, with a pay threshold significantly lower than the one put in place by the Obama administration, which is being welcomed by observers in the hotel industry.
Starting in January 2020, the new rule, under the Fair Labor Standard Act, would classify employees who earn at least $684 per week ($35,568 a year) as exempt, allowing employers to place them on salary. The government believes the threshold, which is an increase from the $455 a week ($23,660 a year) threshold set in 2004, will extend overtime pay requirements to approximately 1.3 million additional employees.
The Obama administration had proposed a higher threshold amount, $47,476 a year, but a federal judge issued an injunction in late 2016 and the U.S. Court of Appeals for the Fifth Circuit upheld an appeal of abeyance in 2017. Following these decisions, the labor department enforced the 2004 threshold and reviewed another increase.
Both the American Hotel & Lodging Association and Asian American Hotel Owners Association praised the labor department’s new rule.
“At its core, hotels are an industry of people taking care of people,” Brian Crawford, EVP of government affairs for the AHLA, said in a statement. “Our associates are our most valuable asset, and as such we have long advocated for policies that modernize our nation’s labor laws to benefit both our associates and business owners. AHLA believes the new DOL overtime rule accomplishes just that, updating outdated salary levels making more employees eligible for overtime, while providing hoteliers much-needed clarity and certainty moving forward.”
In a statement, AAHOA Interim President and CEO Rachel Humphrey shared similar sentiments about striking a balance in raising the threshold.
“America’s hoteliers applaud the administration for updating overtime regulations to create clarity and consistency for employers and employees alike,” she said. “By raising the overtime eligibility annual salary cap to a reasonable level, the administration expands the number of eligible workers while providing small business owners with an appropriate amount of time to plan for its implementation.”
What the new rule means
In a news release, the department of labor’s Wage and Hour Division states the new rule updates the earnings threshold necessary to exempt executive, administrative or professional employees from federal minimum wage and overtime requirements.
Here are the changes as laid out by the labor department:
• raises the standard salary level to $684 per week ($35,568 annually);
• raises the total annual compensation for highly compensated employees from $100,000 to $107,432 annually;
• allows employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to make up to 10% of the standard salary level; and
• revises the special salary levels for employees in U.S. territories and in the motion picture industry.
What employers should do
The labor department proposed a slightly lower increase in March, calling for the threshold to increase to $679 a week ($35,308 annually). Though the actual rule to go into effect 1 January 2020 calls for a higher threshold, it’s close enough, at least for employers keeping an eye on this matter.
Employers have had this on their radar for quite some time, said Andria Ryan, partner at Fisher Phillips. They have roughly three months to review which employees could be affected—which, she said, they should have done earlier this year—and then take action.
That should be enough time for employers to finalize reviews and make changes, she said.
The department of labor is reporting the new rule could affect approximately 1.3 million people, but that’s spread across the country and a far lower number than the 4 million that would have been affected under the Obama administration’s rule.
“It sounds like a lot, but it should be manageable,” she said.
This is a good opportunity for employers to do a reset, Ryan said. Employers can use the threshold rule as a reason to review their employees to make sure they are properly classified as exempt or non-exempt, both in terms of pay and under the duties test. The duties test specifies that even if employees earn more than the salary threshold, they must perform certain executive or administrative work functions to qualify for an overtime exemption.
Once the review is complete and they’ve decided exemption statuses, employers will need to change their payroll for the affected employees, she said. Employers will also need to make sure the employees who have been reclassified as non-exempt receive training and education for their new hourly work schedules, she said.
“They have not been keeping their time,” she said. “They have not had restrictions on the use of their time. They will need some training and education for the record-keeping requirements.”
Both the newly non-exempt employees and their supervisors will need training on handling their loss of flexibility, she said.
The threshold proposed by the Obama administration ran into several legal challenges, but this one should encounter fewer, Ryan said. Any regulation can be challenged for not being properly formulated, but there aren’t any major flaws in this one, she said. An argument could be made that the new threshold is arbitrary and capricious, but that’s a high standard to meet, she said.
She said she is not anticipating any injunctions like seen last time, and her firm is telling its clients to get prepared.