On May 18, 2016, the Department of Labor issued its Final Rule regarding overtime regulations after receiving more than 270,000 comments on their proposed rule published last year. While several changes from the proposed rule were made, the net effect on employers is basically unchanged from that which was set forth in the proposed rule.

The key provision of the Final Rule dramatically increases the minimum salary level for employees to be eligible for the executive, administrative, and professional exemptions. The amount presently in effect based upon the 2004 regulation is $455 per week ($23,660 per year). While the proposed rule sought to increase that amount to $970 per week ($50,440 per year), the Administration, taking the comments of the business community into consideration, determined that the minimum compensation level should be set presently at $913 per week ($47,476 per year).

This amount can be met by payment of a regular salary, however up to 10% of the required salary level could be met through payment of non-discretionary bonuses or other incentive payments such as commissions in order to reach the minimum level. The new regulation points out that these bonus/incentive payments must be paid at least on a quarterly basis.

The effective date for this new overtime regulation is December 1, 2016, unless there is a future action to stay or invalidate the regulation. The minimum salary amount established by this regulation is subject to a mechanism for automatic adjustment every three years. The initial adjustment will be made on January 1, 2020.

Compliance Options

Since the regulation only applies to employees classified as exempt who are presently paid less than $917 per week, employers should prepare a roster of the affected employees or a list of the positions which typically fall within this category. Next, the employer should determine the amount of overtime hours typically worked by the subject employees. This figure will be needed to determine the best method to achieve compliance with the new regulation. While most employers do not track the hours worked by its exempt employees, a reliable estimate should be made in order to make a compliance decision.

Once the universe of affected employees is defined, although the duties requirements for the exemptions have not been modified by this final rule, this would be a good opportunity to review the duties of these employees to assure that they are properly classified as exempt and subject to the new regulation. Once it is confirmed that the duties requirements of the exemption are satisfied, the employer has several options to meet compliance.

If the exempt employee works considerable overtime hours and is presently paid relatively close to the new minimum salary level, strong consideration should be given to raising the salary in order to meet the exemption requirements.

If the exempt employee works a relatively low number of overtime hours and is paid substantially less than the new minimum salary amount, the best option may be to reclassify that employee as non-exempt which would trigger overtime eligibility. Remember that an employer must record the number of hours worked for all non-exempt employees.

The compensation for this re-classified employee could be based upon an hourly rate with 150% of that rate being paid for hours worked over 40 in a workweek. Alternatively, if the number of hours worked is not fixed and typically fluctuates, an arrangement can be established whereby the salary paid will be deemed for all hours worked and then overtime can be paid on a “half-time basis”.

For example – employee’s salary is $750 per week and the employee works 50 hours in week one. This employee’s “regular rate” that week would be $750 divided by 50 hours or $15. Since the $750 salary covered all hours worked, half the regular rate or $7.50 would be the hourly overtime premium for each of the 10 overtime hours worked for a total of $75. Therefore, the total weekly compensation for that week would be $750 plus $75 or $825.

In week two, assuming the employee works 60 hours, the regular rate would be reduced to $12.50 ($750 divided by 60 hours) therefore the overtime premium would be $6.25 times the 20 hours of overtime worked for an additional $125. Therefore the total weekly compensation for this employee would be $750 plus $125 or $875.

In summary, the employer should create a matrix and perform the necessary calculations in order to determine what is the best compliance methodology to reach compliance with the new regulation. Alternatively, the employer should consider reorganizing workloads, adjusting schedules, or if possible, hiring part-time employees to perform some tasks.