Final Overtime Rules Effective December 1, 2016: What You Need to Do to Prepare

Final Overtime RuleUpdate: On November 22, 2016, a federal judge blocked the Department of Labor from implementing and enforcing the final rule and related changes discussed below. Learn more.

The Department of Labor (DOL) has announced a final rule that will increase the minimum salary requirement for the administrative, professional, executive, and highly compensated employee exemptions. The final rule is effective December 1, 2016.

Background:

The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain "exempt" employees. To be considered "exempt," these employees must generally satisfy specific salary and duties tests:

  • Meet the minimum salary requirement;
  • With very limited exceptions, the employer must pay the employee their full salary in any week they perform work, regardless of the quality or quantity of the work; and
  • The employee's primary duties must meet certain criteria.

Final Rules:

New Salary Requirements

Administrative, Professional, Executive Exemptions:

Effective December 1, 2016, the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions will increase from $455 per week to $913 per week (or from $23,660 per year to $47,476 per year). This means that employees who meet the administrative, professional, and executive exemptions must be paid a minimum weekly salary of $913 in order to be exempt from the FLSA's minimum wage and overtime requirements. Exempt computer employees may also be paid hourly, if it is at least $27.63 per hour, which doesn't change under the new rule.

Note: The minimum salary for these exemptions is less than the DOL had initially proposed.

Highly Compensated Employee Exemption:

The minimum total compensation for the highly compensated employee exemption will increase from $100,000 per year to $134,004 per year on December 1, 2016 (at least $913 must be paid on a weekly salary basis).

Bonuses

For the first time, employers may use nondiscretionary bonuses (generally defined as those announced or promised in advance), incentive payments, and commissions, to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. To satisfy the rule, employers may make one final catch-up payment no later than the next pay period after at the end of the quarter if the bonus, incentive payment, or commission ended up being less than anticipated and the employee’s weekly salary plus nondiscretionary bonuses, incentives and commissions does not equal or exceed 13 times the minimum weekly salary of $913.

Note: For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement. This doesn’t change under the final rule. Thus, as long as the employer pays the employee at least $913 on a weekly salary basis, the employer can count these other forms of compensation toward meeting the minimum total compensation requirement ($134,004 per year).

Automatic Adjustments Every Three Years

Every three years, using figures from the Census Bureau and Bureau of Labor Statistics, the DOL will adjust the minimum salary requirement for the administrative, professional, and executive exemptions to keep it at the 40th percentile of full-time salaried workers in the lowest-wage region (currently the South). Additionally, the total annual compensation required for the highly compensated employee exemption will be kept at the 90th percentile of full-time salaried workers nationally. The first adjustment is scheduled for January 1, 2020. The DOL will publish a notice of updated salary requirements at least 150 days before those changes take effect.

No Changes to the Duties Tests

In the final rule, the DOL made no changes to the duties tests for the administrative, professional, executive, or highly compensated employee exemptions.

Compliance Recommendations:

Take this opportunity to ensure your exempt employees meet applicable exemption tests (salary and job duties requirements). Identify which employees meet the administrative, professional or executive exemption and currently earn less than the new minimum. If these employees' salaries fall below $913 per week, you will generally either have to:

  • Option 1: Raise their salaries to the new requirement; or
  • Option 2: Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.

These options are explained in greater detail below.

Option 1: Raise Exempt Employees' Salaries

If you have exempt employees who are paid less than the new minimum, you can simply raise their salaries to meet the new requirement. Remember, effective December 1, 2016, employers may use non-discretionary bonuses, incentive payments, and commissions, to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. For example, if you pay a weekly bonus to an exempt employee, you could count up to $91.30 of it toward meeting the $913 weekly salary requirement.

Option 2: Reclassify Employees as Non-Exempt

If exempt employees don't meet the new salary requirement, you can reclassify them as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek. If these employees rarely work more than 40 hours per week, simply convert their salary to an hourly wage (divide their weekly salary by 40 hours). However, if these employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium when you reclassify them as non-exempt.

Example: An exempt employee's current salary is $715 per week, the employee regularly works 50 hours per week, and you want to reclassify this employee as a non-exempt employee but keep your costs the same. The employee receives no other forms of compensation beyond the salary. You would calculate the hourly wage as follows:

$715 weekly salary


[40 hours + (10 overtime hours x 1.5)]

= $13 hourly rate

This employee would be paid $13 per hour for the first 40 hours and $19.50 per hour ($13 x 1.5) for each hour of overtime.

Featured Resources:

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Posted: May 18, 2016