New Overtime Rules Published

Today, the U.S. Department of Labor (DOL) published its long-awaited new rules governing who is exempt and non-exempt from receiving overtime under the Fair Labor Standards Act (FLSA).  Since 2004, employees have been properly classified as exempt if they met three tests: 1) a salary level test; 2) a salaried basis test; and 3) a duties test.  The new rules only affect the salary level test.  Under the old rules, an employee had to be paid at least $455 per week to satisfy this test.  The new rules, which will go into effect on December 1, 2016, will require that an employee be paid at least $913 per week.

The DOL based this new salary threshold (which translates into $47,476 per year) on the 40th percentile of weekly earnings for all full-time salaried workers in the lowest-wage Census Region of the country (which is currently the Southern U.S.).  This level will be “updated” every three years (beginning on January 1, 2020) to maintain the threshold at that same 40th percentile level, going forward.  In other words, it is likely that the threshold level will increase every three years.  Accordingly, employers with exempt employees earning at or near $913 per week should be prepared to keep pace with these triennial adjustments or else be prepared to treat the employee as non-exempt (i.e., paying him/her overtime) following one of these adjustments.

Another significant difference between the old and new rules is that employers will be permitted to count a portion of nondiscretionary bonuses, incentives, and commissions paid to employees toward the new $913 per week threshold.  Specifically, these payments can make up (at most) 10% of the required salary level.  The new regulations also require that these payments be made on a quarterly or more frequent basis in order to be counted toward that 10% cap.   Nondiscretionary bonuses and incentives are those that are paid based on measurable factors, like a company’s productivity or profits.  Unlike discretionary bonuses, an employee can calculate exactly how much he/she will receive if a particular goal is met. 

By way of example, let’s say that an employer has an otherwise exempt employee whose base salary is $900 per week.  Technically, this would not satisfy the new $913 salary threshold test.  But, if that employer had a practice of giving the employee a $50 per week bonus if a certain production goal is met, that nondiscretionary bonus could be counted toward satisfying the test.  In fact, up to 10% of the $913 (or $91.30) could come from such a bonus program.  If, however, the bonus is not paid because the goal is not met, the employer would have to make a “catch-up” payment to ensure that the employee’s overall compensation meets the $913 per week threshold. The new rules would allow employers to make these "catch-up" payments at the end of each quarter.

The salary threshold for the highly-compensated-employee (HCE) exemption was also modified by the new rules.  Under the current rule, if an employee makes at least $100,000 per year and satisfies a modified duties test, the employee would be considered exempt.  Beginning on December 1, employees can only qualify for the HCE exemption if they earn at least $134,004 annually.  Like the standard salary threshold discussed above, this amount will also be adjusted every three years.  However, those adjustments will be tied to the annual earnings of the 90th percentile of full-time salaried workers nationally.

Employers should note that the final rule differs from the rules the DOL proposed last July in some significant ways.  The following chart compares the current overtime regulations with the proposed rule changes (from July 2015) and the final rules that will go into effect December 1, 2016.

What can you do to prepare?

Employers have six months to prepare for these changes.  We recommend that you calculate the expense of giving additional overtime to any newly-classified non-exempt employees based on their current work schedules. Remember, anyone under the salary threshold will be entitled to overtime for all hours worked in excess of 40 per week.  Compare those expenses to the expenses associated with increasing employee salary levels to $913 per week or above, and make your decisions accordingly.

Develop strategies for containing overtime expenses. For example, adopt and enforce a personnel policy that prohibits working overtime unless authorized to do so by a supervisor. Employers must pay an employee for all hours worked (even when they violate such a policy), but an employer could still discipline an employee for working unauthorized overtime. 

Make sure that you develop timekeeping protocols/rules for any newly-reclassified employees.  Don’t forget to pay for travel time, training time, etc. that you may have not done previously for these employees. 

Evaluate the pros and cons of continuing to pay these on a salary basis even if they are non-exempt.  The law permits this but you will still have to track the employees’ hours worked and pay them overtime any time they work more than 40 hours in a week.

Employers should also take this opportunity to make sure all employees are properly classified based on the other tests, i.e., the salaried basis test and the duties test.   Remember that an employee must satisfy all three tests to be properly classified as exempt from receiving overtime.  For example, should you discover that there is an employee who is improperly classified as exempt because he/she does not meet the requirements of the “Executive” exemption duties test, this change will give you the opportunity to correct that mistake.  (Please note that you should work closely with your employment attorney and proceed with caution under these circumstances because changing employees’ exempt status may alert them to the fact that they have been paid improperly in the past. The DOL can go back up to two years for such non-willful mistakes and collect from your company any unpaid overtime that they determine may be owed.  State departments of labor may be able to go back even further.)

Please note that we have a new video explaining these changes and how they fit into the overall analysis of whether an employee is exempt or non-exempt; as well as a FLSA standard operating procedure for evaluating an employee’s exempt status.  For more information click here.