Department of Labor Announces Changes to Overtime with New Final Rule

June 8, 2016

On May 18, 2016, the United States Department of Labor (DOL), Wage and Hour Division, announced the publication of its final rule updating overtime regulations. The new rule expands overtime laws and regulations to more than 4 million workers. The effects of the new rule will be felt by small businesses and large corporations alike.

What are the changes under the new rule?

The Fair Labor Standards Act (FLSA) guarantees a minimum wage for all hours worked and limits those hours to 40 hours per week without being paid overtime. The FLSA exempts certain categories of employees from minimum wage and overtime requirements, including salaried employees employed in executive, administrative and certain professional capacities (the “white collar” exemptions).

The revised overtime pay regulations will increase the salary threshold for the white collar overtime exemptions from $455 a week ($23,600 annually) to $913 a week ($47,476 annually). The new regulations permit employers to count nondiscretionary bonuses, incentive payments and commissions toward up to 10% of the required salary level, as long as the amounts are paid on a quarterly or more frequent basis. “Catch-up” payments at the end of the quarter are also allowed. The salary threshold that must be paid to highly-compensated exempt (HCE) employees to maintain exempt status also increased, from $100,000 annually to $134,004 annually.

Going forward, the salary threshold for overtime will be automatically adjusted every three years, beginning January 1, 2020. Increases will be published by the Wage and Hour Division 150 days in advance of the effective date of the increases.

Keep in mind that in addition to increases in the amount of salary that must be paid, employees must still meet certain tests regarding their duties and the manner in which salary is paid in order to be classified as exempt and ineligible for overtime. These requirements were not changed by the new rule.

When will the new rule take effect?

The threshold increase from $23,660 to $47,476 and from $100,000 to $134,004 will occur on December 1, 2016. Employers should take steps to insure that their compensation structures comply with the new rule prior to that date.

What issues will the new rule cause for businesses?

The new rule presents a challenge for businesses, especially small to medium-size businesses. Employers will have to make decisions like whether to raise salaries to at or above the new thresholds to maintain exempt status, to pay overtime in addition to an employee’s current salary, or to convert employees to hourly and pay overtime. Employers will also have to decide whether newly non-exempt employees will be expected to have the same workload and work overtime or a reduced workload to maintain hours at or below 40 hours a week. With this, employers may decide to lower compensation to be made up for with overtime, or keep base salaries the same. Newly non-exempt employees will also need to comply with timekeeping requirements.

Additionally, employers are going to have to address the loss of status often associated with a salary. Many employers will view their salary as a “graduation” or something they “earned” after years of punching a clock or after achieving a certain level of education. Many of these employees may not have “punched in” for many years, if ever. Employers will need to address any necessary restructuring to their compensation policies, as well as have these potentially difficult conversations with employees about their new, non-exempt status.

Bottom Line

Employers will need to adjust their current compensation policies to compensate exempt and newly non-exempt employees compliant with the new rule. Employers should proceed quickly but cautiously to complete these tasks before the December 1, 2016, deadline, and are well advised to consult with legal counsel to help navigate these issues.

Leslie Sammon
Leslie Sammon