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Employers: Get Ready or You Could Be Paying for Overtime
Practical Law Legal Update w-003-5064 (Approx. 5 pages)
Employers: Get Ready or You Could Be Paying for Overtime
by Practical Law Labor & Employment
| Law stated as of 23 Sep 2016 • USA (National/Federal) |
This Legal Update summarizes the Department of Labor's (DOL) final rule revising certain overtime exemption regulations under the Fair Labor Standards Act (FLSA) and its impact on employers. The revised regulations take effect on December 1, 2016.
As announced in May, changes to the overtime exemption regulations under the Fair Labor Standards Act (FLSA) are set to take effect on December 1, which means the compliance deadline for employers is quickly approaching (see Legal Update, DOL's Final Rule Doubles Minimum Salary Required for White Collar Exemptions Under the FLSA). The Department of Labor's (DOL) final overtime rule dramatically increases the minimum salary and compensation thresholds for the following white collar exemptions:
Specifically, the final rule:
- Increases the minimum salary requirement for the executive, administrative, and professional exemptions from $455 per week to $913 (the equivalent of $23,660 per year to $47,476), effective December 1, 2016. (Exempt computer professionals may be paid hourly, and the final rule does not affect the minimum hourly rate. Exempt computer professionals paid on a salary basis, however, must be paid a salary of at least $913 per week beginning December 1.)
- Increases the minimum annual compensation requirement for exempt HCEs from $100,000 to $134,004 per year, effective December 1, 2016.
- Establishes a mechanism for automatically updating the minimum salary and compensation levels every three years, starting on January 1, 2020.
- Allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new minimum salary requirement.
- Does not change the applicable duties tests.
The DOL predicts the revised regulations will extend overtime pay protections to more than 4 million workers across the country within the first year of implementation. The biggest impact is expected to be on:
- Employers with exempt employees earning less than $48,000.
- The South and Midwest, where average salaries tend to be lower than the national average.
- The hospitality, tourism, retail, restaurant, health, higher education, and technology industries.
The DOL estimates that the automatic-adjustment provision will increase the salary threshold to approximately $984 per week, or $51,168 per year, by January 1, 2020.
Practically speaking, these changes mean that employers have two options for employees currently classified as exempt who do not meet the new minimum salary. Employers must decide whether to:
- Increase exempt employee compensation to maintain their exempt status.
- Reclassify exempt employees as non-exempt.
Employers must address various issues for employees who will be reclassified as nonexempt, including whether:
- To pay those employees on an hourly basis or treat them as salaried nonexempt.
- They work overtime hours and, if so, how to structure their straight-time pay so their total compensation, including overtime pay, remains approximately the same.
- They will be subject to different fringe benefit plans as non-exempt employees and, if so, whether to make changes in benefit plans.
- To reduce or shift the workloads of newly nonexempt employees to reduce or avoid overtime hours.
Employers must also consider:
- What messages they want to communicate to affected employees and managers to ease the transition.
- What training and education to provide affected employees on various policies, such as timekeeping and overtime.
- How to address the after-hours use of email, as well as other technology or electronic communications devices, by affected employees.
On September 20, 2016, in separate federal lawsuits, 21 states and a coalition of over 50 business and trade associations, challenged the DOL's final rule. The complaints allege the DOL exceeded its authority and seek various declaratory and injunctive relief. However, these legal challenges are unlikely to affect the December 1 deadline and employers should still plan to implement any changes made necessary by the new salary and compensation requirements by that date.
For more information, see:
Update
On November 22, 2016, the US District Court for the Eastern District of Texas issued a nationwide preliminary injunction enjoining implementation and enforcement of the DOL's final rule. The US Court of Appeals for the Fifth Circuit granted the DOL's request for expedited briefing of its appeal, and scheduled oral argument to occur after briefing closes on January 31, 2017. For these and future updates on the DOL's final rule, see Practice Note, Latest Developments: DOL's Final Rule Increasing the Minimum Salary for EAP Exemptions Under the FLSA.