By Julie Kniseley, Firm HR Mgr., James Moore CPA’s

On May 18, 2016, the Department of Labor (DOL) released the long anticipated final rule to the federal overtime regulations – a move that will automatically extend overtime pay protections to 4 million workers.

Employers must pay their employees overtime at a rate of at least 1.5 times the regular rate for the employee for any hours worked over 40 in a week, unless the employee is classified as exempt. The most common exemptions are the executive, administrative, professional, outside sales exemptions (referred to as “white collar” or “EAP” exemptions). The final rule updates the standards used to determine whether white collar salaried employees are exempt from overtime pay protections established by the Fair Labor Standards Act (FLSA) .

What is the FLSA?

The FLSA establishes minimum wage, overtime pay, recordkeeping and youth employment standards covering employees in the private sector and in Federal, State and Local Governments. Generally, employees are covered by the FLSA if they work for enterprises with an annual gross volume of sales made (or business done) of $500,000 or more. Employees of certain entities are covered by the FLSA regardless of the amount of gross volume of sales or business done, including hospitals, businesses providing medical or nursing care, schools, and public agencies. Even if an employer is not covered on an enterprise-wide basis, however, employees may be individually covered by the FLSA.

It is important to know whether your business and/or employees are subject to the provisions of the FLSA, and you should thoroughly review the regulations if you are unsure.

What determines if an employee falls within one of the white collar exemptions?

A white collar employee must meet the following criteria in order to qualify for exemption from overtime regulations:

  • The employee is salaried, meaning they are paid a predetermined and fixed salary that is not subject to reduction because of changes in the quality or quantity of work performed (the salary basis test);
  • The employee is paid more than a specified weekly salary level, which has been updated to $913 per week, equivalent to $47,476 annually for a full-time worker (the salary level test); and,
  • The employee primarily performs executive, administrative or professional duties as defined by the DOL (the duties test).

Certain employees are not subject to either the salary basis or salary level tests and there is also an exemption for certain highly compensated employees.

What changed?

  1. The DOL set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region. This increased the standard salary level from $455 per week ($23,660 for a full-year worker) to $913 per week ($47,476 for a full-year worker).
  2. They also set the total annual compensation requirement for highly compensated employees subject to a minimal duties test to $134,004; and,
  3. They established a mechanism for automatic updates to the salary and compensation levels every three years based on the 40th percentile in the lowest-wage census region.
  4. For the first time, employers are able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level, provided these payments are made on a quarterly or more frequent basis.

No changes were made to the duties test, which is the mechanism used to determine if a position qualifies for the Executive, Administrative or Professional exemption.

The effective date of the final rule is December 1, 2016.

Note: some health care providers that rely predominantly on Medicaid funding will not be subject to the new overtime rule until March 2019.

What do affected employers need to do?

  • Determine which employees are affected.
  • Consider your options and analyze the financial impact. Will you:

-          Raise the pay of current exempt employees to the new threshold level?

-          Reclassify employees as nonexempt and pay overtime?

-          Keep employees on a salary basis but begin to pay overtime after 40 hours?

  • Review your current policies and procedures as necessary
  • Evaluate telecommuting and other alternative work arrangements. 

These regulatory changes can have a significant impact on your organizations and employees. However, it is also an opportunity to evaluate all of your exempt positions against the applicable duties test so that any erroneous classifications can be corrected. 

What is the risk of doing nothing?

The stakes are high for non-compliance. Under the FLSA, “any employer” (which can include supervisors, officers and directors) who violates minimum wage or unpaid overtime compensation laws may be liable for both the shortfall and liquidated damages. For example, employees misclassified as exempt can be eligible for two years worth of back wages (three if the violation is “willful”) at 1.5 times the hourly rate plus liquidated damages equal to the unpaid wages. In 2014 alone, the Wage & Hour Division recovered nearly $241 million in back wages for employees with their investigative force.

Where do I go for more information?

The DOL has general guidance, fact sheets, Q&As and other documents to help you understand these regulatory changes. Specific guidance has been issued for higher education, nonprofit organizations and state and local governments.  Learn more about the new DOL rule.