Today, the Department of Labor released its new overtime rule requiring that employers pay overtime to salaried employees who earn less than $47,500 per year, doubling the previous threshold of $23,660,...
...which will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.
Key Provisions of the Final Rule
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:
Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
Preparing your company and employees for the DOL overtime rule change.
Review the Status of your Current Employees
Businesses should conduct an audit of their current employees’ statuses. Determine which positions are considered exempt and who may become non-exempt. Evaluate this through using current compensation, as well as the duties test (e.g., employees must be in administrative, professional or executive positions). Pay special attention to employees who are currently exempt but may soon be eligible for overtime under the new rules.
Create a Schedule to Update Positions
Once HR teams have established a baseline, it’s important to evaluate the impact of proposed changes on individual positions. For example, will you raise the compensation of a specific position to the threshold to keep it exempt, or will you reclassify the employee as non-exempt and begin paying overtime? Any new non-exempt positions will require a minimum wage test and clear policies around overtime work.
Focus on Training and Communication
Having a clear time-related employee policy is important. Once that is firmly established, invest in training your employees about the new regulations, policies and technology. Your organization should also develop a communications plan. How will you communicate changes to managers or supervisors whose departments may be affected? What is your communication plan for individual employees whose jobs are impacted? What steps will you take to address potential questions or concerns from both groups?
What are the white collar exemptions to the FLSA?.
The FLSA’s white collar exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Certain computer professionals and outside sales employees are also excluded from these requirements. The final rule addresses changes in the salary thresholds for the executive, administrative, and professional employee and HCE categories.
Currently, to qualify for exemption, a white collar employee generally must meet all of the following tests:
Salary Basis Test: An employee must be salaried, meaning that he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
Salary Level Test: An employee must be paid at least a specific salary threshold, which is $913 per week (the equivalent of $47,476 annually for a full-year employee).
Duties Test: The employee must primarily perform executive, administrative, or professional duties, as provided in the DOL’s regulations.
Certain professionals are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers). There is no salary level test required to qualify as an exempt outside sales employee. Finally, the current regulations also contain a relaxed duties test for HCEs who receive total annual compensation of $134,004 or more paid on a salary basis.
Keep in mind that job titles do not determine exempt status, and the fact that a white collar employee is paid on a salary basis does not alone provide sufficient grounds to exempt that employee from the FLSA’s minimum wage and overtime requirements. For an exemption to apply, an employee’s specific job duties and salary must meet all of the applicable requirements provided in the DOL’s regulations.
What is a highly-compensated employee (HCE)?
An HCE is paid total annual compensation of $134,004 or more and is deemed exempt under § 13(a)(1) of the FLSA if all of the following apply:
The employee earns total annual compensation of $134,004 or more, paid on a salary basis.
The employee’s primary duty includes performing office or non-manual work.
The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
For example, an employee may qualify as an exempt HCE if he or she earns at least $134,004 annually and customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.
For HCE exemption under the final rule, employees must earn a minimum of $913 per week on a salary or fee basis, while the remainder of the total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
How are nondiscretionary bonuses and incentive payments included in the salary test?
For other non-HCE employees, the final rule allows nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement. This includes nondiscretionary incentive bonuses tied to productivity or profitability, such as profit-sharing, retention or production bonuses, and incentive payments, including commission payments based on pre-set formulas. Under certain conditions, catch-up payments within the quarter may be allowed.
The final rule does NOT allow discretionary bonuses that are awarded irregularly and at the employer’s sole discretion to be included as part of the standard salary test requirement, such as spot awards for performance or special projects.
Is there a small business exemption from the FLSA or the DOL’s overtime rule for white collar workers?
The FLSA does not provide an exemption for small businesses. Generally, the FLSA and the final rule apply to employees of enterprises that have an annual gross volume of sales made or business done of $500,000 or more, and certain other businesses (enterprise coverage). Even when there is no enterprise coverage, employees are protected by the FLSA if their work regularly involves them in commerce between states (interstate commerce). The DOL has published a Small Business Guide that provides additional information to assist small employers in complying with this rule.
Consequences
A lot of employers incentivize their managers to run the businesses they manage like they own them with salaries and incentive compensation including performance-based bonuses rather than overtime pay. Owners set their own hours and work the hours necessary using their best business judgment rather than a schedule set by a superior. For many beginning managers, this new rule will reduce or eliminate that flexibility and the bonus potential associated with good performance.
Perhaps the biggest consequence of the rule is that it will cause some employers to reclassify salaried employees as hourly, and set schedules so they can more easily track hours worked and avoid excessive claims for overtime. For example, taking a manager’s current salary and allocating it across 45 hours (with 5 hours of overtime pay) will result in no increased labor expense or increased salaries. However, it would mandate five hours of overtime, rather than allowing managers to take advantage of the flexible schedules they currently enjoy.
Additional Information
Fact Sheets:
Guidance for Businesses
Comparison Table: Current Regulations, Proposed Rule, and Final Rule
State-by-State Breakdowns of Workers Affected by DOL’s Final Overtime Regulation