Overtime Exemption Rule Changes

The Department of Labor (“DOL”) has released its final rule that is intended to provide stronger overtime protection and clarity to both workers and employers.  Read the Final Rule here. This general summary email is the first in a series our office will publish on the new overtime rule.

To determine if a white collar employee is exempt from overtime requirements, an employer must assess (i) how the employee is paid (the “salary basis test”); (ii) how much the employee earns (the “salary level test”); and (iii) whether the employee primarily performs certain duties that are excluded from overtime protections (the “job duties test”).

Effective December 1, 2016, the standard salary level at which most white collar salaried employees are eligible for overtime pay under the Fair Labor Standards Act (“FLSA”) increases from $23,660 to $47,476. The new rule also states that up to 10% of the standard salary level can come from non-discretionary bonuses, incentive pay and commissions as long as they are paid at least quarterly. The new rule also permits an employer to make a “catch-up” payment.
Under current law, there is an exemption for highly compensated employees (“HCE”) who make at least $100,000 but whose duties do not exempt them from overtime pay. The new rules increase the threshold for that exemption to $134,000. To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test.
The rule also establishes a mechanism to automatically update the salary and compensation levels every three (3) years, beginning on January 1, 2020. The DOL will publish all updated rates on their website as well as in the Federal Register at least 150 days before their effective date.The new rule does not include any changes to the job duties test.  Therefore employees making above the standard salary level must also meet the applicable job duties test to be exempt from overtime pay.

The DOL has provided a range of options for employers responding to the updated standard salary level.  For each affected employee newly entitled to overtime pay, employers may:

  • increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status;
  • pay overtime rate of pay for any hours over 40;
    • reduce or eliminate overtime hours, reorganize workloads, adjust schedules or spread work hours;
    • adjust wages to reallocate base salary and overtime pay to account for hours worked over 40 to hold total weekly pay constant; or
    • use some combination of these approaches.

Nothing in the rule requires employers to change employees’ pay to hourly from salaried, even if the employees’ classification changes from exempt to overtime eligible.

Except for jobs specified by the DOL, there are no hard-and-fast rules about who is and is not exempt from overtime pay. Under Department of Labor guidelines, the answer to the question depends on the facts and circumstances of each employee’s work situation. Please look for future emails from Messick & Lauer detailing specific areas of the new rule.

If you have any further questions on how to determine if any of your employees are affected by this rule change or what steps you should take to be prepared by December 1, 2016, please email me at jwinston@cusolaw.com or call Messick & Lauer at (610) 891-9000.