Eleven tips to limit the impact of the DOL's overtime rule on workers comp

Updated salary requirements for overtime exemptions started in July and there's another significant increase coming in January. On January 1, 2025, phase two of the Department of Labor's (DOL) updated overtime rules will increase the minimum salary threshold for exempt employees to $1,128 per week ($58,656 per year) and the minimum salary for the "highly compensated employee" (HCE) to $151,164. The rule will also automatically adjust every three years to reflect changes in worker pay.

Many employers began forecasting budget impacts and reclassification needs with the July increase and now is the time to ensure you are properly prepared for the January increase and understand the implications on all aspects of your business operation, including workers comp. While legal challenges continue, it's best to plan to comply and have a Plan B if it is blocked by the courts. Some attorneys expect a resolution before the end of the year and recommend holding off communications with employees.

Here are eleven tips to help minimize the impact on work comp premiums:

1. Identify employees below the thresholds

   Do you currently have white-collar exempt employees who earn less than $58,656 a year or $151,165 for HCE? Remember that meeting the minimum required threshold does not automatically qualify them as exempt. They also must have a fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed and they must pass the job duties test, which has not changed. Remember, the regular rate is based on "all remuneration" earned from employment except for eight specific exclusions in section 7(e) of the FLSA. It includes such things as non-discretionary bonuses, commissions, and some non-cash payments depending on the circumstances.



2. Update job descriptions

   Remember that jobs evolve and duties change, so it's important to periodically review job descriptions to ensure they accurately reflect the roles and responsibilities of your workforce, as it might affect the class codes.



3. Decide if the employees who are affected by the new overtime threshold will be reclassified as non-exempt or receive a pay raise

   If employees are being reclassified, it is important not only for them, but for those who report to them, to understand why they are being reclassified. Be sensitive to the perception that changing from exempt to non-exempt can be viewed as a negative change in status.



4. Understand the impact on the work comp premium

   Since workers' compensation insurance costs are directly tied to total employee wages, in most cases, increasing salaries of exempt workers will increase premiums, based on the employee's classification. However, some states have a payroll cap, which limits the amount reported, so it's important to know the state's rules.
   
   To understand how the rule will impact premium when a worker is changed from exempt to non-exempt status, you'll need to know the rules for treating overtime pay in your state. Except for four states (Pennsylvania, Delaware, Utah, and Nevada), overtime pay can be reduced to straight time when determining the comp premium. Many insurance companies define overtime pay as the wages paid at one-and-a-half times the employee's hourly rate for overtime hours. So, in most states, if a worker makes $30/hr. and is paid $45/hr. for overtime, the company pays premium on the $30, but not the extra $15 if there is adequate documentation of the overtime payments.



5. Keep an eye on your projected payroll

   At the start of your policy year, you provide your insurer with an estimate of your payroll for the coming year. The insurer uses that number to generate an estimated premium. At your policy's year-end, your insurer performs an audit to determine your actual payroll and if you have underestimated payroll, you will owe more premium. If the rule will result in significant payroll changes in 2025, now is the time to discuss it with your insurance agent.



6. Evaluate your time tracking system and train reclassified employees in its use

   An automated time tracking system is critical in ensuring accurate overtime pay. If the records do not clearly break out overtime, premium will be based on the full overtime rate. If the rate of overtime varies, for example, time-and-a-half and double time, be sure the records are distinct, as the adjustment will differ.



7. Don't forget remote workers

   Assess your telecommuting policies and the ability to monitor hours worked when telecommuters are being reclassified.



8. Clearly communicate new terms of employment

   Employees who are reclassified as non-exempt need to be educated about scheduled hours, OT approval policies, timekeeping procedures, different rules about travel, expense reimbursement, company equipment, rules about meal and rest breaks and more. A written communication should be given to each employee about the specific changes.
   
   Keep abreast of legal challenges to decide the timing of notifications.



9. Know the state wage and hour laws

   The rule does not take precedence over more stringent state rules. Generally, businesses must comply with the law that provides the most protection for the employee. Many states have higher thresholds and additional criteria for exempt status than the federal law. Multistate employers should look at compliance on a state-by-state basis.



10. Follow legal challenges

    So far, the rule has only been blocked in Texas where a federal judge found that the rule improperly bases eligibility for overtime pay on workers' wages rather than their job duties.While a district court is hearing the underlying legal challenge, it's possible the Texas ruling could be extended or other pending cases may stay the rule. On the other hand, the rule cleared a major legal hurdle when the 5th U.S. Circuit Court of Appeals ruled that Congress gave the DOL explicit authority to define and delimit the terms of the OT exemption, and therefore the agency acted within its authority.
    
    Another important legal issue involves what evidence an employer must show to prove it correctly classified employees as exempt from minimum wage and overtime pay. Federal appeals courts have rendered conflicting opinions, and the Supreme Court will address it in E.M.D. Sales Inc. v. Carrera. Oral arguments began on November 5.