Is your company ready for the major overtime pay expansion announced by the United States Department of Labor (DOL)? On May 18th, the DOL revealed the details behind the final exemption threshold regulations. The new regulations will greatly expand the number of employees eligible for overtime pay. In addition, the DOL officially announced that the effective date of the Final Rule is December 1, 2016. The nationwide increase to the standard salary level (from $455 to $913 per week) and highly compensated employee total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Given the significant changes, Total HR Management is helping our client companies navigate through the new federal overtime requirements.
In 2014, President Obama directed the Department of Labor to update and modernize the regulations governing the exemption of executive, administrative, and professional employees (EAP) from the minimum wage and overtime pay protections of the Fair Labor Standards Act (FLSA). On May 18, 2016, the Department published a Final Rule to update the regulations.
Final EAP Overtime Pay Expansion Rules
Since 1940, the Department of Labor’s regulations have generally required each of three tests to be met for the FLSA’s EAP exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.
Without intervening action by their employers, the new regulations extend the right of overtime pay to an estimated 4.2 million workers who are currently exempt. It also strengthens existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers whose entitlement to overtime pay will no longer rely on the application of the duties test.
Overtime Pay Expansion Details
The most significant change involves the salary basis test for white-collar employees. In order to meet the salary basis test for the EAP exemptions, employees must be paid a minimum of $47,476 per year or $913 per week. The threshold was set based on the 40th percentile of full-time salaried workers in the lowest income Census Region, currently the Southern states. While this increase is lower than the originally proposed $50,440 per year, it still will result in a significant number of previously exempt employees being now eligible for overtime pay.
For the first time, however, employers will be able to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the standard salary level threshold of $47,476. As a result, an employee with a base salary of $42,729 per year may actually be exempt. In order to attain exemption status, the employee must also receive a minimum of $4,747 in non-discretionary bonus, commission or incentive compensation. Moreover, such compensation needs to be distributed on at least a quarterly basis.
Traditional Exemptions Still Apply
Although the $47,476 minimum salary level will affect millions of white-collar employees nationwide, it does not apply to employees who qualify for an exemption that is not tied to a salary requirement. For example, outside sales employees, teachers, attorneys and physicians all fall under these traditional exemption categories for a variety of reasons under the law. The final rule also does not impact the so-called “duties tests” for white-collar exemptions.
The new salary exemption threshold that has led to this major overtime pay expansion will not be fixed. Instead, an automatic mechanism has been instituted so the salary thresholds for exempt employees will increase every three years, beginning January 1, 2020. The goal of this ongoing increase is the DOL’s focused desire to continue to reflect the 40th percentile for salaried workers in the lowest income Census Region. Opening the door to another major overtime pay expansion, the exemption threshold is anticipated to reach $51,000 in 2020.
Changes For Highly Compensated Employees
Finally, the total compensation requirement for “highly compensated employees” has increased from $100,000 to $134,004 annually, equal to the 90th percentile of full-time salaried workers nationally. The threshold level for these employees is based on total annual compensation, not just those amounts paid on a salary basis. These levels also will adjust every three years. Such employees require “only a minimum showing” that they are otherwise exempt under one of the duties tests.
To learn more about how the overtime pay expansion and the exemption threshold regulations will affect your company, contact Total HR Management to set-up an HR audit. Please call (800) 975-5128 today to speak with an HR professional and access the help your company needs.
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