In May 2016, the Department of Labor (“DOL”) issued final rules regarding minimum overtime salary levels. The new overtime rule goes into effect on December 1, 2016 and requires that nearly all salaried employees earning less than $913 per week, or $47,476 annually, be eligible for time-and-a-half overtime pay. The new overtime rule more than doubles the previous minimum salary level of $455 per week, or $23,660 annually.
Under the Fair Labor Standards Act, unless designated exempt, employees must receive overtime pay for hours worked in excess of 40 hours. This was the case prior to and under the new rule. However, the new overtime rule expands the regulations for determining whether an employee is exempt. Exemption applies to employees in a bona fide executive, administrative, or professional capacity; often referred to as the “white collar” exemption or the EAP exception.
To determine exemption status, the DOL evaluates an employee based on three tests: 1. the Salary Basis Test; 2. the Salary Level Test; and 3. the Duties Test. Under the Salary Basis Test, exempt employees must be salaried, meaning they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed. The Salary Level Test designates that exempt employees must be paid more than a specified weekly salary level. Under the Duties Test, exempt employees must primarily perform executive, administrative, or professional duties. The Salary Level Test and Salary Basis Test do not apply to doctors, lawyers, teachers or employees in outside sales. The new regulations have also adjusted the exception for some highly compensated employees (“HCE”), who now must earn more than $134,004 (up from $100,000) and satisfy a minimal duties test to be exempt.
The primary focus of the new overtime rule is to update the threshold of the weekly compensation level needed under the Salary Level Test for an employee to be excempt; now $913 per week, or the equivalent of $47,476 annually. The DOL set the new salary level at the current 40th percentile of earnings of full-time salaried workers in the lowest wage Census Region (currently the South). In an effort to maintain this status, future automatic updates to the new minimum salary levels will occur every three years, starting January 1, 2020. The DOL did not make any changes to the duties test for the administrative, executive, professional, or highly compensated employee exemptions.
The new rule is estimated to have a substantial impact by extending overtime pay to approximately 4.2 million people who were previously exempt. These employees will either: 1. need to be reclassified as non-exempt and paid overtime whenever they work more than 40 hours in a workweek; or 2. receive an increase in their salary to meet the new requirement. However, employers will experience some reprieve. Under the new overtime rule, for the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, provided these payments are made on a quarterly or more frequent basis. Employers may also make a “catch up” payment. Penalties for violations of this rule could be severe and it is advisable that employers seek legal counsel before the implementation of the rule.