In 2014, President Obama directed the Secretary of Labor to update the overtime regulations to simplify and modernize the rules. The result? Beginning on December 1, 2016, employers must comply with a new set of rules that will put more money in the pockets of millions of workers – or give them more free time away from work.

SUMMARY OF THE NEW RULES

  • Salary threshold. The “exempt” salary level is increasing for the first time since 2004.
    • Standard salary level. The standard salary threshold will now equal the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (currently the South). This will raise the weekly “exempt” salary level from $455 to $913 ($47,476 annualized).
    • Highly Compensated Employees (“HCE”) salary level. The new rules raise the HCE level (above which most white collar workers are ineligible for overtime) to the 90th percentile of full-time salaried workers nationally, from the current $100,000 to $134,004 per year.
  • Automatic updates. To keep up with inflation, DOL’s final rule will automatically update the “exempt” salary threshold every three (3) years, beginning January 1, 2020. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020. The HCE threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020. DOL will post new salary levels 150 days in advance of their effective date, beginning on August 1, 2019.
  • Bonuses, incentive payments, and commissions. The rule will allow up to 10% of the salary threshold for non-HCE employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. This recognizes the importance these forms of pay have in many companies’ compensation arrangements, particularly for managerial employees affected by the final rule. This is a new policy that responds to comments received from the business community on this matter.
  • Duties test. The rule does not make any changes to the “duties tests” that determine whether salaried workers may be properly classified as “exempt.” For workers with salaries above the updated level, employers will continue to use the same duties tests to determine whether or not the worker is entitled to overtime pay.

COMPARISON OF CURRENT RULES, PROPOSED RULES AND FINAL RULE

Companies and compensation managers should be mindful that several of the categories in the Final Rule are different than in the Notice of Proposed Rulemaking issued on July 6, 2015.

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BRACE YOURSELF FOR IMPACT

The new rules go into effect on December 1, 2016. Employers have over 6 months to prepare for the significant impact of these changes. DOL estimates that more than 4 million salaried workers currently ineligible for overtime will become eligible for overtime when they work more than 40 hours (i.e., they will be converted to “non-exempt” status).  DOL further estimates that some 100,000 salaried workers will receive a raise bringing their salary above the new threshold. Employers would be well-advised to conduct an immediate audit of all classifications currently classified as exempt to determine the extent to which these new rules may require either reclassifications or salary increases.

As always, you should feel free to reach out to the Labor and Employment lawyers at Woods Rogers PLC for guidance.

For more information on the Overtime Final Rule, contact us or see www.dol.gov/overtime

Article brought to you by:
Thomas M. Winn III
Principal
Labor and Employment Group

Victor O. Cardwell
Principal and Chair, Labor and Employment Practice Group
Labor and Employment Group

King F. Tower
Of Counsel
Labor and Employment Group