On December 1, 2016, the most significant changes to federal overtime law in more than a decade will go into effect. The federal Department of Labor instituted these changes by amending the Fair Labor Standards Act regulations. The primary change is that the minimum amount employers will be required to pay exempt salaried employees will increase substantially. Employers will be required to pay exempt workers at least $913 per week ($47,476 per year), up from the current requirement of $455 per week ($23,600 per year).
Who is Impacted?
To comply with the new rule, employers should first assess which (if any) of their employees are affected by the change. To be eligible for the so-called “White Collar” exemption, an employee must be salaried and be an administrative, a professional, or an executive employee. Administrative, executive, and professional employees must satisfy a “duties” test for their corresponding job type. For example, to qualify for the administrative exemption the employee’s primary duty must be performing office or non-manual work, and his or her duties must include the exercise of discretion and independent judgment with respect to matters of significance. In sum, employees who do not satisfy the “duties” test must still be paid overtime even if their salary exceeds $913 per week.
While many employers rely on the so-called “White Collar” exemption to comply with federal overtime law, not all employers will be impacted by the changes. In blue collar workplaces, few employees will be impacted because hourly workers, in most cases, must already be paid overtime even if their hourly pay exceeds $913 per week. In a high wage workplace, many employees may already be paid a salary that exceeds $913 per week, and assuming the “duties” test is satisfied, no additional changes are needed to satisfy the “White Collar” exemption. And finally, in a workplace consisting of properly classified outside-sales employees, the law does not require overtime to be paid to these employees even if the salary is below $913 per week. To avoid the spread of misinformation, it is wise to educate managers and HR professionals about these issues.
- Increased Salary Level: Employers will be required to pay exempt workers at least $913 per week ($47,476 per year), up from the current requirement of $455 per week ($23,600 per year).
- Automatic Increases: The $913 per week salary level will update every three years to remain consistent with the 40th percentile of full-time salaried workers in the lowest-wage Census region (currently the South). The next required adjustment will be on January 1, 2020.
- Bonus-Based Compensation: Up to 10% of the standard salary level of $913 per week can come from non-discretionary bonuses, incentive payments, and commissions. But employers who elect this option need to ensure that over the course of a quarter their employees, in fact, earn an average of $913 per week, which comes out to $11,869 per quarter. If an employee does not earn $11,869 over the course of the quarter, he or she is owed a catchup payment that must be paid promptly.
- “Duties” Test Unchanged: As noted above, in order for an employee to be exempt, he or she must be paid $913 per week and satisfy the corresponding “duties” test for that employee type. The Department of Labor had indicated it might make the “duties” test more stringent, but ultimately decided against doing so.
- Highly Compensated Employees: Highly paid employees constitute a special group who must be paid a salary far exceeding $913 per week. However, they can properly be classified as exempt if they satisfy a relaxed “duties” test. The Department of Labor increased the salary level for this exemption from $100,000 to $134,004.
After the employees who are affected are identified, the next step is to choose among three basic options:
- manage employee hours so that employees are never permitted to work more than forty hours per week; or
- pay overtime in any week when an employee works more than forty hours; or
- increase wages to satisfy the $913 per week standard.
Choosing among the three basic options is a business decision. Employers should carefully review their wage policies and contact their employment counsel for assistance complying with the new regulation.