On May 17, 2016, the Obama Administration announced its intent to make millions more employees eligible for overtime pay. The following day, the U.S. Department of Labor issued final regulations under the Fair Labor Standards Act (FLSA), which approximately doubled the salary threshold necessary to exempt employees from overtime requirements. The final regulations will make most salaried, exempt workers earning less than $47,476 per year eligible for time-and-a-half overtime pay when they work more than 40 hour per week. The minimum salary necessary for employers to classify employees as exempt currently is $23,660. The regulations are scheduled to go into effect on December 1, 2016.

Under the FLSA, most “white collar” employees may be exempt from the overtime requirements of the FLSA only if they meet both a “duties” test and a “salary basis” test. The “duties test” generally limits the exemption to employees who perform relatively high-level executive, professional and administrative duties. It is a qualitative test. The salary basis test, which is the subject of these regulations, is quantitative in that salary level is determinative of eligibility, regardless of duties.

The new regulations are expected to hit particular industries, such as retail, tourism and hospitality, the hardest. We expect many employers, who would otherwise experience large increases in employee compensation costs, to react to the new regulations in various ways in order to mitigate their impact. Some may decrease the hours of employees. Others may raise the pay of others to an amount over $47,476 to make them exempt from the overtime rules.

A few other important issues related to the new regulations include:

  • The minimum salary threshold will be adjusted every three years.
  • There is no carve-out for higher education institutions, which had argued that they would not be able to meet the anticipated payroll costs.
  • Republican lawmakers have voiced opposition to the new regulations, and have indicated that they will attempt to pass legislation to block them, but it is highly unlikely that they will be able to secure veto-proof support for any bill in this election year. Senator Tim Scott of South Carolina and Representative Tim Walberg of Michigan introduced the “Protecting Workplace Advancement and Opportunity Act” in early March in anticipation of the new regulations.
  • The Labor Department estimates that 4.2 million workers will become eligible for overtime as a result of the new regulations.

Employers should be reviewing and updating their policies, procedures, job descriptions, and pay classifications in light of these new regulations.