On June 30, 2015, the U.S. Department of Labor issued a Notice of Proposed Rulemaking (NPRM) that will significantly increase the number of employees entitled to receive overtime pay for work in excess of 40 hours during a regular workweek. Once implemented, the new rule is estimated to affect at least 5 million full-time employees by raising the minimum salary required to qualify for the Fair Labor Standards Act’s “white collar” exemptions from $23,600 to $50,440 per year.

The proposed rule follows a directive from President Obama in March of 2014 to Labor Secretary Thomas Perez that the Department of Labor “modernize and streamline” overtime regulations that had last been updated in 2004.

The proposed new overtime rule, like any other proposed change to overtime regulations, is subject to the federal Administrative Procedure Act’s time-consuming rulemaking process. While the Office of Management and Budget has reviewed and approved the NPRM, the document has not yet been published in the Federal Register. Once published – likely next week – there will be a public comment period of probably 60 days. The Department of Labor may then elect to hear testimony, will consider public comments and then will draft a final rule for interagency review. The entire approval and implementation process from this point is expected to take nine to 12 months.

For months now, in anticipation of this proposed change to the FLSA’s exemption threshold, employers and human resources professionals have pondered the implications of such a significant and sudden increase in the minimum salary threshold for exemption from the FLSA’s overtime pay requirements. Outspoken groups such as the National Retail Federation (NRF) have commissioned studies on the overall national economic impact of a rule change that will more than double the minimum salary for “exempt” employees under the FLSA. In addition to sharply increased labor costs – whether in the form of overtime pay or salary increases to maintain the exempt status of managerial employees under the new rule – the NRF warns that “changes in wage levels may bring many store managers or assistant managers under overtime rules, taking away their ability to use their own discretion in deciding whether to put in the extra hours sometimes needed to do their jobs. The requirement to limit non-supervisory duties could keep managers from jumping in to work a cash register, help a customer or restock shelves without losing their exempt status.”

The Society for Human Resource Management (SHRM) has expressed concern that the new overtime regulations will negatively impact employee morale, particularly at the management level. If an employer elects not to raise manager salaries to the new minimum $50,440 per year, those management employees will be reclassified from exempt to non-exempt, a change which is often seen by both managers and rank-and-file employees as a lowering of status within the company.  SHRM projects that the new overtime rule will affect “nearly every employer in every industry and sector.” And, while expressing support for the need periodically to adjust salary levels, SHRM noted that “an over 100 percent increase from the current [salary] level will significantly impact employers and employees and will disproportionately affect the non-profit and service sector industries, as well as certain geographic areas of the country.”

To prepare for the new overtime rule, the prudent employer will have some tough issues to consider:

1.  Review and reassess employee classifications.

In advance of the new overtime pay rule, an employer will need to review and reassess the classification (i.e., exempt or non-exempt) of all full-time employees making less than $50,440 per year. For each employee whose job duties truly fall within one of the FLSA’s so-called “white collar” exemptions, an employer must decide whether to raise the employee’s salary to a minimum of $50,440 or reclassify the employee as non-exempt and pay the employee the required “time and a half” for all hours over 40 worked during the employee’s regular workweek.

For example, if a currently exempt employee makes significantly less than $50,440 today, the employer may conclude that paying the employer overtime will be less costly than raising the employee’s base salary. However, since many currently FLSA-exempt employees are not required to record their time worked and often put in extra hours at their own discretion, the employer may not really know how much “overtime” the employee typically works in a given pay period, much less over the course of an entire year.

2.  Reevaluate employment policies and pay practices pertaining to overtime.

Employers will also need to reevaluate their policies and practices pertaining to overtime and recordkeeping. The steady increase in the number of FLSA claims and lawsuits based on unpaid overtime claims during the past decade or so instructs that employers as a whole need to have tighter controls on employees’ work hours, eliminating or at least minimizing the amount of unauthorized excess time worked by employees. Managers and supervisors must not tolerate unauthorized work by non-exempt employees and must be prepared to discipline noncompliant employees in order to contain payroll costs. Policing and enforcement of work hour policies will pose an increasing challenge for employers once the new overtime rule goes into effect.

3.  Evaluate employee work schedules as a whole in light of increased labor budget.

Depending upon the number of additional non-exempt employees on an employer’s payroll once the new overtime rule goes into effect, and the associated increase in labor costs that will accompany the rule change, an employer may be required to restructure some portion of its workforce just to stay in business.  For instance, a small company with a dozen full-time employees facing a more-than double labor cost may need to eliminate some full-time positions in favor of part-time positions in order to avoid FLSA overtime pay requirements for non-exempt employees.  Such a change could have a negative impact on employee morale and operational efficiency, but may be necessary to keep labor costs contained.

While the final implementation of the new overtime rule is still months away, employers need to start number-crunching right away to figure out what their current workforce will look like – and how much it will cost them – when the rule takes effect likely during the first quarter of 2016.