On May 18, 2016 the U.S. Department of Labor (DOL) announced its final rule on the minimum salary threshold that white-collar employees must be paid to qualify as "exempt" from the overtime requirements under the Fair Labor Standards Act (FLSA). The new salary level has now increased to $47,476 ($913 per week) from $23,660 ($455 per week) annually and takes effect December 1, 2016. According to the DOL, these new rules will extend new overtime protections to 4.2 million workers in the U.S.
Background on the Ruling
In 1975, roughly 62% of salaried American workers were covered by overtime protections. Those protections now cover only 7% of salaried American workers today, according to the White House. The current salary threshold of $23,660 has remained in place for more than a decade, which now fails to cover many middle-class and low-wage workers the rule was intended to protect.
The New Ruling
While affected employees welcome the change, employers are not so happy. The final salary level of $47,476 was a minor reduction from the salary level of $50,440 that was initially proposed by the DOL. The rule change will cost many employers more money and/or force employers to re-organize segments of their workforce or job categories.
The DOL's final overtime rule will still nearly double the salary threshold for overtime exemption effective December 1, 2016, and the rule requires salary updates every three years thereafter. The first scheduled update will be effective January 1, 2020 and it will increase the salary level to approximately $51,168. The amount will be adjusted closer to the effective date based on actual data available at that time.
The new salary test ($47,476 per year or $913 per week) will be based on the 40th percentile of full-time salaried workers in the South - the lowest-income Census region.
Currently, any workers who earn more than $23,660 per year are not eligible for overtime pay beyond the standard 40 hours per week if they also perform certain executive, professional, or admin duties. This new ruling leaves the current duties test in place which is important since there had been wide speculation that the final rule would modify the duties test.
The new regulations also increase the "highly compensated employee" threshold from $100,000 to $134,004, under which employers may establish the overtime exemption by meeting far less stringent duties tests - this threshold will also be adjusted every three years and is expected to increase to approximately $147,524 in 2020.
How can employers remain compliant?
Businesses will need to examine their employee's pay to ensure they're complying with overtime.
- Raise worker's salary to at least $47,476 to make them exempt from the overtime threshold
- Switch employee to non-exempt status and pay an overtime premium of time-and-a-half the employee's regular rate of pay for any overtime hours worked
- Reduce or eliminate overtime hours while also switching employee to a non-exempt status
- Convert the employee to non-exempt status and reduce the amount of pay allocated to base salary and add pay to account for overtime hours worked over 40 in the workweek
- Use a mix of the above options
The DOL estimates employers will spend $592.7 million to comply with the new rule.
How will this impact employers?
There are a few important things to note about the proposed changes to the overtime eligibility rules in addition to compliance options discussed above:
- You do not have to change job titles or job duties for employees (the determining factor is salary level).
- Many employers will now have more employees eligible for overtime pay without better planning and monitoring of employee hours worked.
- Employers must examine their current policies and practices, especially time keeping policies, as it relates to these employees in the $23,600-$47,476 pay range in order to ascertain any hidden overtime. It may come as a huge (financial) surprise that there are exempt employees in this pay range who are now working overtime on a weekly basis.
- Employers need to be aware of, and include time spent by exempt employees in this pay range who are performing work activities while working through lunch or outside of their normal work hours. This may include making phone calls from home or in the car, sending emails from home or working from home since these type of common “exempt” activities may now be considered for overtime purposes.
- Determine how these new overtime rules, timekeeping, and payroll practices are going to be communicated to employees and how will this impact morale and work performance.
- Consider an outside third party to perform an audit of your systems and recordkeeping.
Employers always had a legal obligation to keep and track employee hours. However, if you have been lax in that area up to this point in time, there is a greater incentive in the form of cost savings to track employee hours in order to remain compliant with these new threshold changes.