Have an Exempt Employee? Think Again . . . Department of Labor Issues Final Rule Updating Overtime Regulations

UPDATE:  The following blog was posted on May 20, 2016.  On November 22, 2016, a nationwide preliminary injunction was issued blocking the new overtime rule from taking effect.

 

On May 18, 2016, the United States Department of Labor (DOL) announced that the long anticipated new federal overtime rule will be published on May 23, 2016, with an effective date of December 1, 2016. Under the new rule, the minimum salary for executive, administrative and professional employees to be exempt from overtime pay will double to $913/week ($47,476/year).  There are other changes as well, but this is the most significant.  Notably, there are no changes to the standard job duties test, which remains in effect.

By way of background, under the federal Fair Labor Standards Act (FLSA), certain executive, administrative and professional employees are exempt from overtime pay requirements.   To be exempt, such individuals generally must be paid a predetermined and fixed salary at or above the salary level discussed below and must primarily perform executive, administrative or professional duties, the details of which are discussed in DOL regulations. The DOL regulations at issue were last updated in 2004.  According to the DOL, the new overtime rule will result in 4.2 million people becoming eligible for overtime pay.  Of those, almost 79,000 are Minnesotans who will benefit from the new rule.

The most significant changes under the new rule are as follows:

1. The minimum required salary for an individual to be exempt from overtime pay requirements under the FLSA will increase to $913 per week (which equates to $47,476 per year).  This is slightly more than double the current level ($455 per week/$23,660 per year).  The salary was set at the 40^th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, which is currently the South, and is lower than the amount that was initially proposed.

 

2. The minimum salary level automatically will increase every three years, starting on January 1, 2020.  Again, it will be based on the 40^th percentile of earnings of full-time salaried workers in the lowest-wage Census Region.

 

3. For the first time, employers may count nondiscretionary bonuses and other incentive payments (such as commission payments) toward a portion of the minimum salary threshold.  Be careful, however, as there are strict limits on the use of such nondiscretionary bonuses and incentive payments, including:

• • Nondiscretionary bonuses and incentive payments can only be used to satisfy up to 10 percent of the new standard salary level.  So, even if a company pays significantly more in nondiscretionary bonuses and incentive payments, the amount that can be applied to the standard salary level is capped at 10%.

• • In order to apply nondiscretionary bonuses and incentive payments to a portion of the standard salary level, an employer must make such payments on a quarterly or more frequent basis.

• • If an employee does not earn enough in nondiscretionary bonuses and incentive payments in a given quarter to retain his/her exempt status, an employer may, within one payroll period, make a “catch-up” payment to account for the shortfall and to allow the employee to remain exempt.  If the employer does not make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.

• • Discretionary bonuses may not be applied to satisfy any portion of the standard salary level.

 

4. Certain highly compensated employees may be exempt from overtime pay requirements if they receive at least the standard salary amount of $913 per week (without including nondiscretionary bonuses and other incentive payments) and satisfy a minimal duties test.  While the minimal duties test has not changed, the total annual compensation requirement for such highly compensated individuals will increase to $134,004 per year (the current level is $100,000).  This amount is based on the 90th percentile of salaries for national full-time salaried workers and will be adjusted every three years, starting on January 1, 2020.

 

While the new rule makes significant changes to the standard salary threshold to determine whether an individual is exempt from overtime pay requirements, the new rule will not change the standard duties test.  In other words, to be exempt from overtime pay under the FLSA, the individual must not only be paid a salary at or above the standard salary level, but he/she also must primarily perform executive, administrative or professional duties (or other duties if a different exemption applies).

Employer Takeaway:  The new rule takes effect on December 1, 2016, which gives employers approximately six months to prepare.  Don’t waste the time…plan now!   From a pure compliance standpoint, employers have two options with regard to workers who currently are classified as exempt and who receive a salary between $455 per week (current level) and $913 per week (level as of December 1, 2016):

1. Employers can increase the salary of such individuals to meet the new salary level (taking into account nondiscretionary bonuses and incentive payments discussed above), or

2. Employers can reclassify such individuals as non-exempt, track the hours such individuals work, and pay them overtime for working more than 40 hours in a work week.

 

From a practical standpoint, employers need to give this much more thought.  Among the considerations are the following:

1. Certain employees may view being reclassified from exempt to non-exempt as a demotion.  How will you communicate with such employees and address such non-legal issues?
2. Will employees who are being reclassified as non-exempt be told they are not allowed to work outside of normal business hours (because, if they do, such time counts as hours work for which they need to be paid and, if they work more than 40 hours in a work week, they are entitled to overtime pay)?
3. Will employees who are being reclassified as non-exempt have their pay rate adjusted in some way?
4. Will employees who are being reclassified as non-exempt be converted to hourly employees or remain salaried employees (salaried employees can be non-exempt and receive overtime pay)?
5. Will employees who are being reclassified as non-exempt lose flexibility or any company benefits (some companies have different benefits for exempt and non-exempt employees)?
6. If an employee is reclassified as non-exempt, how will the employer track hours worked so that the employer can, among others, accurately pay overtime to the employee?
7. If an employee’s salary is increased to meet the new salary threshold to allow the individual to remain exempt, how will other employees who do not receive a raise respond?
8. How will the employer account for any increased labor costs?  Will the employer absorb the cost, increase prices, or reduce the workforce?

 

UPDATE:  The blog above was posted on May 20, 2016.  On November 22, 2016, a nationwide preliminary injunction was issued blocking the new overtime rule from taking effect.