Overtime Rule

Changes in the Overtime Rule on Salary for Exempt White-Collar Employees

20 May 2016

On Wednesday, May 18th, the Obama administration in conjunction with the Department of Labor (DOL) released its final rule on the minimum salary that white-collar employees must be paid to qualify as exempt from the overtime requirements under the Fair Labor Standards Act (FLSA), its first update to the rules since 2004.

Starting December 1, 2016, the final rule will: 

  • Increase the new salary level for exemptions from $23,660 to $47,476, or $913 per week annually for a full-year worker
  • Rise the salary level from $100,000 per year to $134,004 per year for employees who qualify for the “highly compensated employee” exemption
  • Establishes a mechanism for automatically updating the salary threshold every three years, increasing predictability
  • Ensure eligibility for overtime opportunities to 4.2 million additional workers

Generally speaking, in order to be exempt from overtime pay, an employee has to pass 2 tests – the salary exemption and the duties test. The salary exemption states than an employee must earn above a certain baseline in order to be exempt from any overtime pay; the above changes increased this amount from $23,660 to 47,476.

The 2nd test needed to see if an employee is exempt is referred to as the duties test. Under this test, employees may be exempt from overtime pay if their primary work duties are either executive, administrative or professional. The DOL has not made any changes to this test at this time, however, the salary test needs to be applied along with the duties test to determine if employers are required to pay overtime. More information on the duties tests can be found at: https://www.dol.gov/whd/overtime/fs17a_overview.htm (note: this page has not be updated for the new salary threshold).

Employers will need to be aware of these changes as non-compliance could open up the potential for unpaid wage lawsuits from employees and sanctions from the DOL. Employers will need to immediately begin plans to track hours of workers once considered exempt and should scrutinize their workforce to see if any changes are required. Some other options employers may wish to consider:

  • Increasing the salary of any exempt employee to the current threshold of $47,476 if it is currently below that amount
  • Change the employee to non-exempt status and limit their hours to avoid overtime
  • Change the employee to a non-exempt status and pay overtime including an overtime premium of one and a half times the regular rate of pay
  • Hire additional part time support at a lower rate to supplement current needs

Employers also need to be cognizant of the additional hidden costs involved with additional employee compensation. As a rule of thumb, employers should add about 10% to the amount of any changes in compensation in order to cover mandatory fringe costs, such as FICA Tax (7.65%), State and Federal unemployment, Workers Compensation and payroll processing costs.

Such sweeping changes will affect industries across the board, from small and medium sized businesses to school districts to other not-for-profit entities. Employers need to begin taking steps to plan for this transition now, and will need to update their strategic plans and operating budgets in light of these changes.