FLSA & Final Overtime Rules: What You Need to Do to Prepare

Update Urgent Notice:

On November 22, 2016, a federal judge blocked the Department of Labor (DOL) from implementing and enforcing the final rule and related changes discussed below. What you need to know:

  • The rule has been delayed and will not go into effect on December 1, 2016 as expected.

  • However, the rule might still become effective at some point in the future.

  • Given the uncertainty, employers may want to discuss possible next steps with legal counsel.

  • We will continue to monitor the rule and update this page as developments unfold.

    • Update: On December 1, 2016, the DOL filed a notice of appeal with the federal court. The DOL then filed a motion for an expedited schedule, which the appeals court granted on December 9, 2016.  The expedited schedule means briefing on the appeal will close in late January 2017, at which point oral arguments could occur.

Background:

The 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 employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as "exempt" employees. To be considered "exempt," these employees must generally satisfy three tests:

Salary-level test

1. Salary-level test

Beginning December 1, 2016 employers must pay employees at least $913 per week to qualify for the executive, administrative, and professional employee exemptions.

Salary-basis test

2. Salary-basis test

With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.

Duties test

3. Duties test

The employee’s primary duties must meet certain criteria.

Final Rules:

New Salary Requirements

The DOL has made the following increase to the minimum salary requirement for the administrative, professional, and executive exemptions:

Weekly: $455 (current), $913 (effective 12/1/16)  |  Yearly: $23, 660 (current) $47,476 (effective 12/1/16)

Beginning December 1, 2016, employees who meet the administrative, professional (including the salaried computer 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.

Highly Compensated Employees: The DOL's final rule also raises the total compensation required for the highly compensated employee exemption (employees who regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee) from $100,000 per year to $134,004, $913 of which must be paid on a weekly salary basis.

Incentives, Bonuses, and Commissions: For the first time, beginning December 1, 2016, 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.

Automatic Adjustments Every Three Years

Every three years, the DOL will adjust the minimum salary requirement for these exemptions. 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.

How to Comply:

#1: Ensure that your "exempt" employees are properly classified under the final rule.

Beginning December 1, 2016, employees who receive less than $913 per week are considered "non-exempt" and must be paid at least the minimum wage and overtime. Employees who are paid a salary of at least $913 per week and perform job duties that meet the administrative, executive, or professional exemption, may be classified as "exempt." If an exemption no longer applies (i.e. the employee no longer performs certain job duties, or earns less than $913 per week), the employee should be promptly reclassified as "non-exempt" and paid overtime in accordance with federal and state law.

#2: Compare the costs of raising employees' salaries.

Compare the costs of raising an exempt employee's salary to reclassifying the employee as non-exempt and paying them overtime when they work more than 40 hours in a workweek. If an employee's salary is well below the new minimum and they rarely work overtime, it may be more cost-effective to reclassify them as non-exempt. Conversely, if an employee's salary is closer to the new minimum or they frequently work overtime, you may want to consider raising their salary to maintain the exemption. Remember that with automatic adjustments every three years, you will need to review and adjust exempt employees' salaries at least every three years.

These options are covered in further detail below:

Option 1

Option 1: Raise Exempt Employees' Salaries

If you have exempt employees who are paid less than the new minimum, you can raise their salaries to the new requirement. If you elect this option, it is a best practice to review their job duties to ensure they continue to qualify for an exemption. Additionally, make sure exempt employees' job descriptions accurately reflect current responsibilities.

Note: If you provide your exempt employees with nondiscretionary bonuses, incentive payments or commissions, factor this in when calculating the potential costs of raising their salaries to meet the new requirement.

Option 2

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. See an example.

Note: Employers have the option of paying non-exempt employees on a salary basis as long as the employee is paid at least the minimum wage for all hours worked and overtime when he or she works over 40 hours in a workweek. If you pay non-exempt employees on a salary basis, you must ensure that all time worked is accounted for and that the employee is paid overtime when due. Learn more.

#3: Properly track all hours worked.

Once the rules take effect, employers' timekeeping practices may face increased scrutiny. Ensure that you have a mechanism in place to track all non-exempt employees' hours. Remember that previously exempt employees may be used to working after hours, so consider training these employees on your timekeeping policies and procedures to prevent after hours work.

ADP® Time & Attendance can help you track employees' hours and meet your state and federal pay requirements.