An estimated 4.1 million salaried workers will become eligible for overtime pay under the new rule published by the DOL that goes into effect December 1, 2016. The updated rule substantially changes which administrative employees are entitled to overtime pay under the “white-collar exemption” of the Fair Labor Standards Act (FLSA).
The U.S. Department of Labor (DOL) has released a final rule regarding which executive, administrative and professional employees — otherwise known as “white-collar workers” — are entitled to overtime pay under the Fair Labor Standards Act (FLSA). Under the new rule, employers may need to reclassify many employees previously viewed as exempt from overtime requirements.
Currently to qualify for a white-collar exemption from the overtime requirements under federal law, an employee generally must satisfy three tests:
1. Salary basis test: The employee is salaried, meaning he or she is paid a predetermined and fixed salary that’s not subject to reduction because of variations in the quality or quantity of work performed.
2. Salary level test: The employee is paid at least $455 per week or $23,660 annually.
3. Duties test: The employee primarily performs executive, administrative or professional duties.
The exemption is determined based on the employee’s specific job duties and earnings, which must also meet applicable requirements.
The current regulations also provide a relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $100,000 and at least $455 per week. Additionally, doctors, lawyers and teachers are not subject to either the salary basis or salary level tests.
The New Rule
The DOL’s updated rule, which goes into effect December 1 of this year, has changed the salary level test. The rule increases the salary threshold for exempt employees to $913 per week or $47,476 per year. The final rule allows up to 10% of the salary threshold for non-HCE employees to be met by payments such as nondiscretionary bonuses, incentive pay and commissions, as long as these payments are made on at least a quarterly basis.
Thus, an employee’s performance bonuses could push him or her over the threshold and into exempt status (assuming the other tests are satisfied).
Highly Compensated Threshold Changes
The rule also updates the HCE threshold to $134,004 per year. The final rule continues the requirement that HCEs receive at least $913 — per week, without regard to the payment of nondiscretionary bonuses and incentive payments. Such payments will, however, count toward the total annual compensation requirement.
Beginning in 2020 the standard salary and HCE compensation levels will automatically update every three years. The new salary levels will be issued by the DOL 150 days before their effective date.
Actions employers should consider
Employers should analyze the compensation of employees currently considered exempt because of a salary level that is over $23,660. Many of these employees may not be exempt under the new rule, and the employer should analyze whether it makes sense to raise their salaries to the new exemption level of $47,476 or be prepared to pay them overtime.
Let’s consider two scenarios. If the employee is well below the new threshold but rarely works more than 40 hours per week it probably makes sense to do nothing other than communicate the new eligibility and make whatever process changes are necessary to begin paying the overtime when the person works more than 40 hours in a week.
However, if the employee is close to the new threshold (say, earning a salary of $44,000) and works more than 40 hours per week on a regular basis, it may be a better move to raise the salary level in order to maintain the exempt status.
The cost of the new overtime rules is more than just the increased compensation; it also includes additional payroll tax liability, as well as administrative costs to comply.
Every company will have different scenarios and needs to analyze each case individually. If you have questions about your company’s unique situation and the best way to comply with the new DOL rules, contact Frazier & Deeter’s Employee Benefit Plan Services Group.