New Rule to Increase Overtime Eligibility

  • May 19, 2016

On May 18, 2016, the Department of Labor (“DOL”) issued new rules regarding overtime pay under the federal Fair Labor Standards Act (“FLSA”).  The new rules will significantly increase the number of workers who are subject to the overtime requirements of the FLSA, as the DOL estimates that millions of workers across the country will be affected by the changes.  These new regulations will become effective on December 1, 2016.

The FLSA generally requires that workers be paid overtime at a rate of 1½ times their regular rate of pay for every hour worked in excess of 40 in a work week.  However, certain white collar workers are exempt from the overtime requirements if (i) they receive a salary which exceeds a certain minimum amount (“salary test”), and (ii) they perform certain types of executive, administrative, and/or professional duties (“duties test”).

The new overtime rules reflect the DOL’s belief that the current minimum salary requirement for the white collar exemptions is too low, and that millions of workers who should be entitled to overtime pay are being treated as exempt.

The significant changes in the new rules include the following:

  • Increase of salary threshold to $47,476 per year. The new rules will raise the minimum salary threshold for the white collar exemptions from $23,660 per year to $47,476 per year ($913 per week).  This means that most workers who receive an annual salary of less than $47,476 must be treated as non-exempt and subject to overtime requirements, regardless of the type of duties they perform.  The DOL estimates that, as a result of this change, 35% of full-time salaried workers will be automatically entitled to overtime, based solely on their salary level.
    Certain categories of professional employees, such as doctors, lawyers, and teachers, will remain exempt from the overtime requirements regardless of their salary level.  The new rules also do not change the exemption for academic administrative employees, who will generally be exempt if they (i) perform administrative duties directly related to academic instruction or training at an educational establishment, and (ii) receive a salary which is at least equal to the entrance salary for teachers at the educational establishment.
  • Increase of salary level for Highly Compensated Employee exemption. The FLSA also provides for an exemption for highly compensated employees (“HCE”) who receive a certain level of salary and perform exempt duties.  The new rules will increase the salary requirement for the HCE exemption to $134,004 per year.
  • Automatic increases to salary thresholds. The minimum salary requirement for the white collar exemptions will be automatically increased every three (3) years beginning January 1, 2020.  Each update will raise the required salary level to the 40th percentile of full-time salaried workers in the lowest wage Census region, which the DOL estimates to be $51,168 in 2020.  The salary threshold for the HCE exemption will also automatically increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.  The DOL will announce the updated salary requirements at least 150 days in advance of their effective date, beginning August 1, 2019.
  • Bonuses, incentive payments, and commissions. The new rules will allow up to 10% of the salary requirement for the executive, administrative and professional exemptions to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis.
  • No changes to duties test. Although the DOL had requested comments in the proposed regulations regarding possible changes to the duties tests for the white collar exemptions, the new rules do not make any changes to the those tests.

There are a number of strategies that employers might utilize to help insure compliance with the new rules, including raising salaries to meet the new salary threshold, adjusting work schedules, or simply paying overtime to newly non-exempt employees.  As the new overtime rules go into effect on December 1, 2016, employers should begin identifying employees that may be affected by the changes and working on a plan for compliance with the new rules.

For further information or inquiries regarding the new overtime rules, please contact Brian Ritchie at [email protected].

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