Earlier today, the United States Department of Labor announced publication of its final rule updating overtime regulations under the Fair Labor Standards Act. Since 2004, the overtime regulations had granted employers an exemption from overtime for employees making $455 per week ($23,660 annually) and otherwise meeting the executive, administrative, or professional duties tests (which tests will remain unchanged). The new regulations – which will become effective Dec. 1, 2016 – double the salary basis exemption threshold to $913 per week ($47,476 annually).

The new threshold is set at the 40th percentile of full-time workers in the lowest income Census region (currently the South), and will be updated every three years, beginning on Jan. 1, 2020, to account for the effects of wage inflation. The President’s announcement concerning the new regulations projects that the threshold will increase to over $51,000 by 2020. Employers will, however, be permitted to satisfy up to 10 percent of this threshold through payment of non-discretionary bonuses incentive payments (including commissions).

The new regulations also increase the “highly compensated employee” threshold from $100,000 to $134,004 (equivalent to the 90th percentile of salaried employees nationally), under which employers may establish the overtime exemption by meeting far less stringent duties tests. This threshold will also be adjusted every three years to account for the effects of wage inflation.

The Department of Labor estimates that over 4.2 million employees – including over 55,000 Kentucky employees and nearly 87,000 Indiana employees – will be affected by these changes. The Department also estimates that another 732,000 employees currently eligible for, but not receiving, overtime because their employers are incorrectly applying the executive, administrative, or professional duties tests, will begin receiving overtime because of the increased threshold.

Employers are now faced with a simple choice: either increase employee salary levels to meet the increased exemption threshold, or maintain salaries below the new threshold with the understanding that any employee hours above 40 in any work week will be paid at 1 ½ times the regular hourly rate.