May 2016
New Overtime Rules Announced by Department of Labor Today 

Today the United States Department of Labor (DOL) issued long expected new rules that will potentially entitle millions of workers across the country who were not previously entitled to overtime pay to time and half their regular rate of pay when they work more than 40 hours in any  work week.  These changes will become effective on December 1, 2016.  If you currently employ workers that you have been treating as exempt, you need to learn and understand  these changes.

First, some background: Under the Fair Labor Standards Act (FLSA), certain employees are exempt from the law's minimum wage and overtime requirements.  Three of the most common exemptions are the Executive, Administrative and Professional (EAP) exemptions.  To qualify for the EAP exemptions, an employee must be paid a minimum guaranteed wage (currently $455 per week, or $23,660 per year) on a "salary basis," which means that the guaranteed minimum salary must be fixed and cannot be reduced or "docked" except in limited circumstances.  In addition, the employee's primary job duties must involve the performance of executive, administrative or professional work, as outlined in the DOL's regulations.

In July of 2015, the DOL proposed changes to the current exemption rules.  The proposed changes received quite a bit of press, but today, the DOL has  finally announced the new final rules.  The main thrust of the new rules is that the minimum required salary levels for the EAP exemptions are increasing substantially -- they are in fact doubling.  Specifically:
  • In addition to meeting the job duties tests - which are not changing under the new rules - employees will now need to be paid at least $913 per week, or $47,476 per year, to qualify for the EAP exemptions.  This amount will update automatically every three years, beginning on January 1, 2020, to keep pace with current standard salary levels in the lowest-wage Census Region (which is currently the South).  The new rules do allow up to 10% of this amount to be in the form of nondiscretionary bonuses and incentive payments that are paid on a quarterly or more frequent basis.  If the employee does not end up qualifying for the nondiscretionary bonus or incentive payment, there is also a provision that allows employers to make a "catch up" payment to retain the employee's exempt status.
  • Additionally, the minimum salary threshold for the FLSA's Highly Compensated Employee (HCE) exemption is increasing to $134,004 annually (up from $100,000 annually).  The HCE compensation threshold, like the EAP compensation threshold, will also update automatically every three years under the new rules.  For HCEs, nondiscretionary bonuses and commissions and other nondiscretionary deferred compensation may comprise a significant portion of the total compensation.  HCEs only need to be paid at least the standard weekly salary of $913 per week, or $47,476 per year, on a salary basis.  The entire remainder of the HCE minimum salary can be in the form of nondiscretionary bonuses, commissions and and other nondiscretionary deferred compensation.
There are no two ways about it:  these new changes are not particularly good news for employers who currently employ a significant number of exempt EAP or HCE workers at or near the current minimum salary thresholds, particularly if those workers regularly work significantly more than 40 hours per week.  However, there are steps employers can take between now and December 1, 2016, to minimize their overtime exposure going forward.  The first and most important step is for employers to evaluate whether current exempt employees are already being compensated at a level that will meet the new salary thresholds.  Significant overtime exposure may be avoided simply by raising employees' annual salaries slightly - an option that may make a great deal of sense for employees who are currently making close to the new threshold and who regularly work a significant amount of overtime.  Another option, which may make more sense for employees who only work a minimal amount of overtime but whose salary is much closer to the current minimum than to the new minimum, is to simply pay overtime pay when the employee works more than 40 hours per work week.  Better monitoring and, if necessary, limiting work hours to ensure that employees seldom or never work overtime is yet another option.  Reclassifying current exempt salaried employees to non-exempt hourly employees, and adjusting their compensation to an hourly rate that, with overtime hours, and which will approximate the employee's total current salary, is yet another possibility.

This is not intended to be a comprehensive overview of the new exemption rules. If you want to learn more, or have questions about what the new rules mean for your organization, please contact your Hall Estill attorney.

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