News & Insights

Employers Beware: New Federal Overtime Rules Effective December 1, 2016

In May, the U.S. Department of Labor released the final new rules on Fair Labor Standards Act (FLSA) overtime standards, which take effect December 1, 2016. In a nutshell, the FLSA requires that most employees in the U.S. be paid at least the federal minimum wage for all hours worked and overtime pay at one and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, certain groups of employees are exempt from the overtime pay requirements. The most common exemptions from overtime eligibility are known as “white collar” exemptions and apply to employees working in jobs the FLSA describes as: executive, administrative, or professional. In order to qualify for one of these “white collar” exemptions, there are two requirements: (i) the employee must perform executive, administrative or professional duties, and (ii) the employee must earn a certain weekly salary of not less than $455 per week ($23,660 annually). For “highly compensated employees” subject to a minimal duties test, the current threshold is $100,000 annually.

Under the final new rules, the salary threshold for the executive, administrative, and professional exemption will effectively double, increasing from $23,660 ($455 per week) to $47,476 ($913 per week). In addition, the total annual compensation requirement for “highly compensated employees” will also increase from $100,000 to $134,004. The salary basis test will be amended to allow employers to use non-discretionary bonuses and incentive payments, such as commissions, to satisfy up to 10 percent of the new standard salary level. Future automatic updates to these thresholds will occur every three years, beginning on January 1, 2020.

In order to comply with these final new rules, employers should assess whether employees are properly classified as exempt or non-exempt based on the various requirements outlined by the Department of Labor and state wage enforcement agencies. Next, employers will need to decide how to address those otherwise exempt employees whose current salaries would not satisfy the new rule by either increasing their salaries or converting them to non-exempt status. If the latter, employers may want to consider offering training to its workforce to explain the changes in the new rules. For example, newly non-exempt workers may need to be trained on how to accurately track and record work time. Employers may also opt to manage overtime costs through limited hours and additional hiring or elect to use the fluctuating workweek method to minimize overtime costs. Finally, employers should consult with legal counsel throughout this process and discuss the best way to implement these changes and the financial and operational impact it may have on their business.

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