New Overtime Rule

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On May 17, 2016, the Department of Labor announced the release of its long-awaited revisions to its overtime exemption rule. The new rule doubles the salary requirement for white collar (executive, administrative and professional) employees from $23,660 per year ($455 per week) to $47,476 per year ($913 per week).  The required minimum salary for the highly compensated employees’ exemption also has been raised from $100,000 to $134,004. These salary levels will be subject to automatic adjustments every three years. The new rule does not change the duties test for any of the exemptions. It will take effect on December 1, 2016. Our firm will be holding a complimentary webinar on Wednesday, May 25 to discuss the changes and offer practical suggestions on how to comply with the new rules.

The Current Rule

The current overtime rules set forth three tests, all of which must be met in order for a white-collar employee to be deemed exempt: (1) the salary basis test – the employee must be paid on a salary basis, not subject to reductions for fluctuations in quantity or quality of work; (2) the salary level test – the employee’s salary must be at least $455 per week (equaling $23,660 per year); and (3) a duties test – the employee must perform certain duties specific to the executive, administrative or professional exemption in question.  There is also a highly-compensated employee exemption under which an employee must make at least $100,000 per year and perform at least one exempt duty.

What the New Rule Does

According to the DOL’s summary of the rule, the salary level for the white collar exemptions has been raised to $47,476 per year, which is less than the $50,400 per year suggested by the DOL in its proposed rule, but is slightly more than double current levels. This number is based on the 40th percentile of earnings for full-time salaried workers in the lowest income U.S. Census region (currently the South). On the other hand, the highly compensated employee salary level has been increased to $134,004, which is quite a bit more than the $122,148 that had originally been proposed. This number is based on the 90th percentile of full-time salaried workers nation-wide, rather than the regional data used for the white collar exemptions.

The required salaries will be subject to automatic adjustments every three years, beginning on January 1, 2020. For white collar employees, the increase is tied to the 40th percentile of full-time salaried workers in the then-lowest income region of the country. Based on projected wage growth, the DOL estimates that the first increase will result in a minimum salary of more than $51,000. Using the same projected wage growth for highly compensated employees, whose salary level is tied to 90th percentile nationally, their salary level would rise to approximately $144,000.

The DOL has added a provision allowing employers, for the first time, to count bonuses and incentive payments, including commissions, for up to 10% of the salary threshold, as long as these payments are made on a quarterly or more frequent basis. In addition, employers may make a “catch-up” payment at the end of each quarter.

Although there was some concern that the DOL would implement changes to the duties tests, this has proved to be unfounded.

What’s Next

Employers need to be prepared to come into compliance by December 1, 2016. This will require employers to review the status of employees who are currently designated as exempt but whose salaries do not meet the new threshold. If an employer wants to continue to classify those employees as salaried exempt, it will have to make sure that their salaries meet the new threshold.  In the alternative, employers may choose to reclassify positions as non-exempt, in which case they have a number of choices concerning the method of payment. Additionally, employers will need to train both managers and the newly non-exempt employees they supervise on a range of issues, such as refraining from off-the-clock work and recording actual hours worked.

Our firm will be holding a one-hour complimentary webinar on Wednesday, May 25, at 1:00 p.m. Eastern, to discuss the changes and offer practical suggestions on how to comply with the new rules. Due to demand, we have added a second date on Thursday, June 2, 2016, beginning at 1:00 p.m. (EST). For more information about the webinars and to register, please click here.

In addition, the DOL’s website provides links to a number of resources regarding these changes: