On May 16, 2016, as we expected, the United States Department of Labor (“DOL”) issued its Overtime Final Rule expanding overtime coverage to an additional 4.2 million employees.
Summary of the Final Rule:
- Standard salary level: The final rule has increased the salary level to $913.00 per week ($47,476.00 annually);
- Highly Compensated Employee (“HCE”) exemption: The final rule increases the annual salary for these employees to $134,004;
- Bonuses, incentive payments, and commissions: The final rule will allow up to ten percent (10%) of the salary threshold for non-HCE employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis;
- Automatic updates: The final rule provides that the salary threshold will automatically update every three years, beginning January 1, 2020. Each update will raise the salary threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region;
- Duties test: The final rule did not make any changes to the duties test that determines whether certain salaried exempt employees earning more than the salary threshold are ineligible for overtime pay; and
- Effective date: The final rule goes into effect on December 1, 2016.
Impacts of the rule:
- 4.2 million employees will be affected by this rule change because their current salary is below the new salary threshold for salaried exempt employees. Unless employers increase the salary of these employees to meet the new salary threshold, they will now be entitled to overtime pay; and
- Many employers will not be able to afford the higher salary threshold and will be forced to give up the exemption on these employees. While this may seem like a positive for the employee, it may not prove to be, because the employee will then lose the many perks of salary pay, as well as be converted to a lower hourly rate.
The new rule is here, and employers have very little time to review their employee pay classifications and determine how to address the change. The first step should be identifying all salaried-exempt employees. The next step is determining whether any salaried-exempt employees earn less than $913.00 per week. If the employee earns more than that amount, then no changes need be made. However, for the employees who earn less than the new threshold, the employer has a few options: (1) raise the salary to meet the new threshold; (2) leave the salary alone, but do not allow the employee to work overtime (more than 40 hours in a given work week) while also requiring the employee to record their time like a normal hourly employee; or (3) convert the employee to hourly pay, and pay overtime for all hours worked in excess of 40 in a given work week. Please keep in mind that options 2 and 3 require the employer to pay overtime pay if the employee works more than 40 hours in a given work week. The employer controls whether the employee is permitted to work overtime, so be vigilant to keep down your labor costs.
We recognize that the new overtime rule, like most federal labor regulations, can be confusing and one size does not necessarily fit all. Therefore, you should obtain legal advice specific to your company to ensure compliance.