The US Department of Labor (DOL) has issued new rules governing overtime pay that will automatically extend overtime pay eligibility to approximately 4.2 million workers. Under the new rules, which take effect December 1, 2016, most salaried workers earning less than $913.00 a week ($47,476.00 annually) will be entitled to overtime pay. This newly prescribed wage level is more than double the current amount ($455.00 per week or $23,660.00 per year) at which workers are generally considered exempt from overtime rules.
A brief summary of the Fair Labor Standards Act (FLSA) is helpful in understanding what is going on here. The FLSA requires employers to pay their employees at least the federal minimum wage (currently $7.25 per hour) for all hours worked and overtime pay at a rate of 1.5 times their regular rate of pay for all hours worked in excess of 40 in a working week. . Certain categories of employees are exempt from coverage under the Act, including doctors, lawyers, and teachers. In addition, the FLSA exempts from coverage employees who are engaged in an “executive, administrative, or professional capacity.” These workers have historically been referred to as “white collar workers.” The Act itself, however, does not define the terms “executive,” “administrative,” or “professional,” leaving it to the DOL to issue regulations that define the scope of these exemptions.
Current DOL rules require that an employee meet each of the following three tests to qualify for the white-collar exemption: (1) is paid a fixed, predetermined salary that is not subject to reduction for quality or quantity of work performed (the “wage base test”); (2) the employee’s salary amount meets a specified minimum amount (the “salary level test”); and (3) the employee’s duties involved executive, administrative, or professional duties, as defined in DOL regulations (the “duties test”). The recently issued rules affect the second of those tests, the “salary level test.”
So, beginning December 1, when the new rules take effect, most white-collar workers earning less than the “standard wage level” of $913.00 per week will be entitled to overtime for hours worked in excess of 40 in a given work week. That will be the case regardless of whether these employees meet the other two tests for the white collar exemption. This standard wage level was determined based on the 40th percentile of earnings for full-time salaried workers in the lowest-wage region of the country, currently the South. Going forward, the standard salary level will be subject to adjustment every three years, again, by reference to the 40th percentile of full-time salaried workers in whatever is then the lowest-wage region of the country.
Employers may use non-discretionary bonuses and incentive payments (such as commissions) to satisfy up to ten percent of the standard salary level, provided these payments are made quarterly or more frequently.
Lastly, the new regulations also affect those who are considered “highly compensated employees” (HCE) under the Act. Currently, employees whose annual earnings are $100,000.00 or more are generally exempt from the overtime rules, even if they don’t they meet the “homework test”. When the new rules take effect, the applicable dollar amount to qualify as an EHR will increase to $134,004.00.
The DOL estimates that approximately 4.2 million workers who are currently considered exempt under the FLSA will be entitled to overtime in the first year of implementation of these new rules. That number is expected to grow to more than 5 million workers within ten years of implementation. It is estimated that an additional 65,000 EHRs will be eligible for overtime in the first year after the rule change, and 200,000 will be affected within ten years.
Clearly, many employers will be affected by these changes and employers are encouraged to be aware of how these new rules will affect their payroll practices.
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