U.S. Department of Labor Announces Final Rule on Overtime Exemption

The U.S. Department of Labor today issued its much anticipated final rule on the overtime exemption for “white collar” workers under the federal Fair Labor Standards Act. The final rule is expected to impact the overtime eligibility of 4.2 million workers who are currently classified as “exempt” (non-overtime eligible) under the executive, administrative and professional exemptions. The new rule is expected to cost employers $12 billion in overtime wages over the next decade.

The final rule takes effect on December 1, 2016, giving employers just six months to comply.

Under the new rule, the minimum salary threshold for the overtime exemption increases from $23,660 to $47,476 annually – or $913 per week. That level equates to the 40th percentile of salaried workers in the lowest wage census region, currently the South. The rule provides for this rate to adjust automatically every three years based upon that same standard. The minimum annual salary threshold is expected to increase to more than $51,000 in 2020.

The proposed rule received unprecedented negative feedback from businesses, in particular in low wage industries (such as retail and service businesses) and the non-profit sector where the economic impact is expected to be most severe. Although the Department of Labor made some modest adjustments from its proposed rule, including reducing slightly the minimum salary threshold (from $50,440 to $47,476), business groups remain highly concerned about the potential impact on their workforces.

Other highlights of the new rule:

  • For the first time, employers may credit nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to ten percent of the minimum salary threshold. These payments must be made on at least a quarterly basis, and certain “catch up” payments are permissible.
  • The total annual compensation threshold for highly compensated employees subject to a “minimum duties test” increases from $100,000 to the 90th percentile of all salaried workers, or $134,004.
  • The current “duties tests” for the executive, administrative and professional exemptions remain unchanged.

Given this development, we recommend that employers take the following steps immediately in preparation for the December 1 effective date:

  • Review the salary ranges of the positions in your organization that are currently considered exempt under the executive, administrative and professional exemptions.
  • Consider whether nondiscretionary bonuses, incentive payments or commissions may be available to help reach the new minimum salary threshold.
  • For those classifications that straddle or fall below the new salary basis threshold, consider whether to adjust them upward to maintain the exempt status, or whether to reclassify them as non-exempt, overtime eligible. If you intend to maintain the exempt status, make sure that these positions indeed meet the applicable duties test.
  • For any positions becoming non-exempt, develop a plan to begin recording hours worked. Employers are required to keep accurate records of hours worked on a weekly basis for non-exempt workers. It may be helpful to begin tracking those hours now in order to better plan for the overtime conversion later this year.
  • Develop a strategy to convert employees to an overtime eligible pay methodology that complies with the new rule, minimizes the economic impact on your organization, maintains pay consistency for workers, and accounts for issues of employee morale.
  • If you want to continue to pay affected employees on a salary basis (rather than shifting these employees to hourly), consider whether the fixed salary for fluctuating hours (or flexible work week) overtime methodology may be available. This method complies with federal wage laws and may help reduce your overall overtime liability. Be sure to check state laws as well if you pursue this option.
  • Evaluate whether to implement or extend work rules limiting or prohibiting unauthorized overtime to the classifications being converted to non-exempt status.

The attorneys in the Labor and Employment Group of Bose McKinney & Evans are available to answer your questions and provide guidance as needed to comply with this far-reaching new law.

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