To: Clients and Friends of the Firm:
The U.S. Department of Labor released today its final rule updating the overtime regulations of the Fair Labor Standards Act (FLSA). It is estimated that the new rule will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.
As a reminder, an employee is exempt from the overtime pay requirement of the FLSA if three conditions are satisfied: (1) the employee is paid a predetermined fixed salary each pay period that is not subject to reduction because of the quantity or quality of his/her work; (2) the employee is paid no less than a specific minimum salary threshold; and (3) the employee primarily performs job duties that qualify as professional, executive or administrative white collar work, as defined by the FLSA regulations. The final rule focuses only on the second condition: the salary threshold.
Specifically, the final overtime rule increases the salary threshold level to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South. This equates with a salary level of $913 per week/$47,476 annually. This is a significant increase from the prior threshold of $455 per week/$23,660 annually. The final rule also establishes a mechanism for automatically updating the salary level every three years, beginning on January 1, 2020, to maintain a threshold equal to the above percentile. The DOL will publish all updated rates at least 150 days before their effective date. Finally, the new overtime rule allows employers for the first time to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new salary level. These payments must be made on a quarterly or more frequent basis, and employers may make a “catch-up” payment if an employee does not earn enough in nondiscretionary bonuses and incentive payments in a given quarter to retain their exempt status. The employer will have one pay period to make up the shortfall. If the employer chooses not to make a “catch up” payment, the employee will be entitled to overtime pay for any overtime hours worked during that quarter.
The effective date of the final rule is December 1, 2016.
Employers, if they have not already done so in anticipation of this new rule, should immediately review the salary levels of their exempt employees. For those employees who are paid below the new salary threshold, employers will need to determine whether to reclassify the employees as nonexempt, or increase their current salary level to maintain the employees’ exempt status. Simultaneously, employers will need to consider whether the new rule will create salary compression issues; whether staff should be added to limit overtime liability for newly classified nonexempt employees; whether policies should be implemented to limit remote work or restrict work beyond 40 hours in a single workweek for newly classified nonexempt employees; whether benefits should be reduced as a cost-savings measure; and whether work flow will be hampered in any way. Employers will also need to develop a robust and comprehensive communication and training program to manage the workplace changes that will result from the new overtime rule.