The federal Department of Labor (DOL) has released proposed changes to the overtime regulations. These proposed changes would increase the salary level for exemption from overtime to $921 per week (or $774 per week, if employed in American Samoa by employers other than the federal government), from the current salary threshold of $455 per week. On an annual basis, this would increase the annual salary level required for exemption to $47,892, from the current requirement of $23,660.

The DOL proposes to set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers. This would raise the salary threshold to about $970 a week ($50,440 a year) in 2016.

Automatic annual increases to the salary level test

The DOL proposes to automatically update the standard salary and compensation levels annually either by maintaining the levels at a fixed percentile of earnings or by updating the amounts based on changes in the CPI-U.

Salary level for executive, administrative, and professional employees

In order to be exempt from overtime, executive, administrative and professional employees would have to be compensated on a salary basis of at least $921 per week (or $774 per week, if employed in American Samoa by employers other than the federal government), exclusive of board, lodging or other facilities.

Computer professionals

The overtime exemption as proposed would apply to any computer employee who is compensated on a salary or fee basis at a rate of $921 per week or more (or $774 per week, if employed in American Samoa by employers other than the federal government), or on an hourly basis at a rate of at least $27.63 an hour.

Highly compensated employees

The DOL also proposes to set the total annual compensation level for highly compensated employees (HCEs) at $122,148 per year to “ensure that the HCE exemption continues to cover only employees who almost invariably meet all the other requirements for exemption.” The current salary threshold for HCEs is $100,000 annually. An employee earning $122,148 annually would be exempt if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.

If an employee’s annual compensation does not total $122,148 by the last pay period of the 52-week period, the employer may, during the last pay period or within one month after the end of the 52-week period, make one final payment sufficient to achieve the required level.

For example, if the annual salary level for a highly compensated employee is $122,148, an employee may earn $100,000 in base salary, and the employer may anticipate based upon past sales that the employee also will earn $25,000 in commissions. However, due to poor sales in the final quarter of the year, the employee actually only earns $10,000 in commissions.

In this situation, the employer may within one month after the end of the year make a payment of at least $12,148 to the employee. Any such final payment made after the end of the 52-week period may count only toward the prior year’s total annual compensation and not toward the total annual compensation in the year it was paid.

If the employer fails to make such a payment, the employee does not qualify as a highly compensated employee, but may still qualify as exempt under the executive, administrative or professional exemptions.

Duties tests remain the same

The DOL has not yet proposed altering the duties tests for exemption, although this may change during the public comment period and with the release of the final regulations.

For more information about the new proposed regulations, including fee payments, rules for computing compensation, the impact of additional compensation (e.g. commissions or bonuses) on exempt status, and rules for educational establishments see Part 2 of this article.

We will also provide tips on what employers can do to help avoid compliance issues in the wake of the proposed rules.

Use BLR's new Overtime Rules Calculator to determine how the proposed changes will affect your organization's payroll budget.