Employers need to consider the rule, its impact on labor costs and the best way to respond.

What is the new overtime rule?

The FLSA requires that most employees in the U.S. be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, certain groups of employees are exempt from the overtime pay requirements.

In short, the change can explained this way: Once the rule is in effect, if an employee earns less than $47,476 a year, he or she is eligible for overtime.

This changes longstanding criteria for treating certain employees as exempt from the overtime requirements of the FLSA.

The new requirements amount to the most significant change to wage payment laws in the United States in decades.

Thousands of managers who may suddenly become eligible for overtime (generally, a rate 1.5 times a regular hourly rate for all hours worked each week over 40 hours), employers must understand the rule, and consider how it wants to utilize the large number of additional employees now eligible for overtime.

The most common exemptions from overtime eligibility are known as "white collar" exemptions and apply to employees working in jobs the FLSA describes as: Executive, administrative, or professional. In order to qualify for one of the so-called white collar exemptions, there are two requirements: The employee must perform executive, administrative or professional duties, and the employee must earn a certain weekly salary.

The main change in the FLSA rules, effective this Dec. 1 is an increase in the minimum weekly salary to the 40th percentile of weekly earnings for full-time salaried workers, based on the Bureau of Labor Statistics data. Under the new rule, anybody making a salary of less than $47,476 ($913 a week) will automatically qualify for overtime pay when he/she works more than 40 hours a week. This is twice the previous overtime pay threshold of $23,660 a year, which had remained unchanged for more than a decade.

The new rules will allow non-discretionary bonuses, incentive payments and commissions to count for up to 10% of the minimum salary, provided that these amounts are paid at least quarterly.

For highly compensated employees, the threshold is equivalent to the 90th percentile of earnings for full-time salaried workers, or $134,004 annually (the previous amount was $100,000).

For the first time in FLSA history, the salary and compensation levels are indexed to the BLS data and will be updated every three years to maintain the levels at the above percentiles, beginning Jan. 1, 2020.

For 2020, the DOL estimates the 40th percentile will mean that the minimum will go up to $51,168. The DOL estimates the 90th percentile in 2020 will be $147,524.

What classifications do the changes impact?

The changes impact the white collar exemptions: Executive, administrative or professional.

As mentioned above, in order to claim a white collar exemption, the employee must: Pass the job duties test and be paid a minimum salary level.

The duties test means that in order to qualify for any of the white collar exemptions, the employee must meet certain tests regarding his/her job duties. The regulations establish separate duties requirements for executive, administrative and professional employees, respectively.

Under the standard duties test, an employee's primary duty must be that of an exempt executive, administrative or professional employee. Primary duty means the principal, main, major or most important duty that the employee performs. A determination of an employee's primary duty is based on all of the facts in a particular case, with an emphasis placed on the character of the employee's job as a whole.

To be clear, the rule makes no changes to the duties test — just the applicable salary threshold.

The changes also do not apply to outside sales employees and other professionals, like doctors, lawyers and teachers.

Everybody else had better pay attention.

What is the practical impact of the rule?

Lawsuits alleging employers' failure to comply with overtime rules have long been a staple on court dockets, costing industry literally billions in the aggregate.

For starters, then, the new rule increases the sheer number of people eligible for overtime, and therefore increases the potential class of plaintiffs for would-be wage-and-hour lawsuits.

That litigation risk can be managed through careful compliance.

Employers have until Dec. 1, 2016 to reclassify any exempt employees who no longer satisfy the new salary threshold. (The exempt status of employees who do meet the minimum salary requirement is still contingent on satisfaction of the duties test, which remains unchanged.)

This is actually one positive impact of the rule: It allows employers who may have misclassified employees an opportunity to quietly correct those misclassifications before the end of the year.

The time to consider reclassification is now.

It may be, therefore, that the greater impact is on how businesses actually staff themselves.

That impact will be occasioned not because substantive job duties have changed, but rather because the salary threshold has changed. This will in turn force employers to carefully consider strong consideration of employee utilization to control labor costs.

Indeed, millions of workers will no longer qualify as exempt, and therefore, they will be eligible for overtime. The DOL estimates that the rule change will extend the right to overtime payment to approximately 4.2 million currently exempt workers.

The DOL also estimates that the new rule will result in approximately 35% of all full-time, salaried workers being eligible for overtime based on their salary level alone. The DOL believes that the new rule will result in workers receiving an aggregate pay increase of $1.2 billion per year. Many employer groups are disputing the $1.2 billion estimate, arguing that employers will take measures to avoid increased labor costs, like reducing hours and headcount.

The biggest impact will be felt in the education and health services industries. Other industries also affected significantly are: Wholesale/retail trade, professional and business services, and the leisure and hospitality industries.

In addition, according to the Labor Department, female workers stand to benefit the most from the rule change, as they make up 56% of newly eligible workers.

The DOL estimates that employers will spend $592.7 million to comply with the new rule. Employers should be diligently planning for the impact on their operations and finances. One efficient way to do this is to work with wage and hour counsel to conduct an assessment of all positions an employer previously treated as exempt, and then compare this list with a newly created list of currently exempt employees, pursuant to the FLSA rule change.

For employees previously classified as exempt, but whose compensation does not satisfy the new minimum salary threshold, employers should:

• Reclassify these employees as non-exempt;
• Determine how to compensate affected employees;
• Make changes in payroll processing and information technology systems to properly convert these employees to non-exempt; and
• Develop internal communications plans — including a communications plan to explain the change for reclassified employees.

The time to plan for these changes is probably yesterday, and certainly now.