New Overtime Rules to go Into Effect

On May 18, 2016, the Department of Labor’s published a final rule updating the overtime regulations under the Fair Labor Standards Act (FLSA), which will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.

Key Provisions of the Final Rule

The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:

1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);

2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and

3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

This Final Rule updates the regulations for determining whether “white collar” salaried employees are exempt from the Fair Labor Standards Act’s minimum wage and overtime pay protections. They are exempt if they are employed in a bona fide executive, administrative, or professional capacity, as those terms are defined in the Department of Labor’s regulations at 29 CFR part 541. This exemption from the FLSA is sometimes referred to as the “white collar” or “EAP” exemption.

To qualify for exemption, a white collar employee generally must:

1. be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);

2. be paid more than a specified weekly salary level, which is $913 per week (the equivalent of $47,476 annually for a full-year worker) under this Final Rule (the “salary level test”); and

3. primarily perform executive, administrative, or professional duties, as defined in the Department’s regulations (the “duties test”).

Prior to this rule change, employers could utilize salaried white collar employees to work over and above 40 hours per week while paying sometimes less than hourly workers were making based on overtime requirements.  Now, white collar salaried workers who meet the above requirements will need to be paid at least $47,476 per year.