Gavel[fusion_builder_container hundred_percent=The U.S. Department of Labor (DOL) has made dramatic changes to the determination of which executive, administrative and professional employees — otherwise known as “white-collar workers” — are entitled to overtime pay under the Fair Labor Standards Act (FLSA). The new rules will make it more difficult for employers to classify employees as exempt from overtime requirements. In fact, the DOL estimates the changes will make an additional 4.1 million salaried workers eligible for overtime pay when they work more than 40 hours in a week.

The current rules had not been revised since 2004, prompting President Obama to call for the updates. The DOL issued a proposed rule in July 2015 and received more than 270,000 comments in response.  The final version of the new rules will become effective December 1, 2016.

Requirements for white-collar exemptions

To qualify for a white-collar exemption from the overtime requirements, an employee generally must satisfy three tests as follows:

 

Old Rule

 

New Rule

 

(Current)

 

(effective December 1, 2016)

       
Salary Basis Test The employee is salaried, meaning he or she is paid a predetermined and fixed salary that’s not subject to reduction because of quality or quantity of work performed.   No Change to Salary Basis Test
Salary Level Test The employee is paid at least $455 per week or $23,660 annually.   The employee is paid at least $913 per week or $47,476 annually.
      Up to 10% of the salary can be met by nondiscretionary bonuses, incentive pay, and commissions, as long as paid at least quarterly.
Duties Test The employee primarily performs executive, administrative or professional duties.   No Change to Duties Test
  Relaxed duties test for certain highly compensated employees (HCEs) with total annual compensation of at least $100,000, including a salary of at least $455 per week.   Relaxed duties test for certain highly compensated employees (HCEs) with total annual compensation of at least $134,004, including a salary of at least $913 per week.

 

Certain employees (for example, generally doctors, teachers and lawyers) are not subject to either the salary basis or salary level tests.

Significant changes under the final rule

The revisions in the final rule mainly relate to the salary level test. The rule increases the salary threshold for exempt employees to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (currently the South) — $913 per week or $47,476 per year.

In response to what the DOL described as “robust comments” from the business community, the final rule allows up to 10% of the salary threshold for non- highly compensated employees to be met by nondiscretionary bonuses, incentive pay and commissions, as long as these payments are made on at least a quarterly basis. Thus, an employee’s production or performance bonuses could now push him or her over the threshold and into exempt status (assuming the other tests are satisfied).

The rule also updates the HCE threshold above which the relaxed duties test applies. It raises the level to the 90th percentile of full-time salaried workers nationally, or $134,004 per year.

The final rule continues the requirement that HCEs receive at least the full standard salary amount — or $913 — per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments.

The standard salary and HCE annual compensation levels will automatically update every three years to maintain the levels at the prescribed percentiles, beginning January 1, 2020. The DOL will post new salary levels 150 days before their effective date.

The duties test

The final rule makes no changes to the duties test. In the proposed rule, the DOL had sought comments regarding the effectiveness of the test at screening out workers who aren’t bona fide white-collar workers.

But it determined that the new standard salary level and automatic updating will work with the duties test to distinguish between overtime-eligible workers and those who may be exempt. Moreover, as a result of the revised salary level, employers won’t need to consider the duties test as often — if a worker’s pay doesn’t satisfy the salary level test for exemption, the employer needn’t bother assessing the worker’s duties.

Compliance options

According to the DOL, employers have a range of options when it comes to complying with the changes to the salary level.  Options include:

Doing nothing. You might choose to do nothing if your white-collar workers fall short of the new salary level but never work more than 40 hours per workweek.

Raising salaries. You may want to raise the salaries of employees who meet the duties test, have salary near the new salary level and regularly work overtime. Paying them at or above the salary threshold will maintain their exempt status.

Paying overtime above a salary. You could continue to pay employees a salary covering a fixed number of hours, which could include hours above 40. For example, you might:

  • Pay employees a salary for the first 40 hours of work per week and overtime for any hours over 40.
  • Pay a straight-time salary for more than 40 hours in a week for employees who regularly work more than 40 hours, and pay overtime in addition to the salary. You will only be required to pay an additional half-time overtime premium for overtime hours already included within the salary, plus time and a half for hours beyond those included.
  • Agree with the employee on a fixed salary for a workweek of more than 40 hours, with the salary including overtime compensation under certain conditions. Employees must always be paid based on the hours actually worked during the workweek, though, so salary adjustments may be necessary at times. This will likely work best for employees who consistently work the same amount of overtime every week.
  • For employees with fluctuating hours, pay a fixed salary covering a fluctuating number of hours at straight time if certain conditions are met.

And, of course, you might reorganize workload distributions or adjust employee schedules to redistribute work hours in excess of 40 across current staff. You could also hire additional employees to reduce or eliminate overtime hours worked by your current staff.

The big picture

The cost of the new overtime rules is more than just the increased compensation; it also includes additional payroll tax liability on that compensation, as well as administrative costs to comply. We can help you come into compliance with the new DOL overtime rule and determine the overall impact on your bottom line.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]