By Susan Prince, JD, M.S.L., Legal Editor

The federal Department of Labor (DOL) is releasing the final changes to the overtime regulations. The most prominent change is the increase in the salary level required for exemption from overtime to an annual salary of $47,476. This translates to a weekly salary of $913.

This means that your employees who currently earn more than $455 per week ($23,660 annually), but less than $913 per week, need to be reclassified as nonexempt and will be entitled to overtime for any hours worked over 40 in a week. The final rule will take effect on December 1, 2016.

The DOL is increasing salary level for employees in American Samoa to $767 per week. In addition, the “base rate” for employees in the motion picture industry will increase to $1,397 per week.

According to the DOL, this will raise Americans’ wages by an estimated $12 billion over the next 10 years, with an average increase of $1.2 billion annually. Additionally, the DOL states that this change will extend overtime protections to 4.2 million additional workers who are not currently eligible for overtime under federal law.

No changes to the duties tests

The DOL has not altered the duties tests for exemption. Therefore, employers will follow the duties tests that they have been familiar with since 2004.

Increases to the salary threshold every 3 years going forward

The DOL will automatically update the standard salary and compensation levels every 3 years going forward. This will be easier on employers than the originally proposed annual updates. The DOL has set the salary level at the 40th percentile of full-time salaried workers in the lowest income region in the country, which is currently the South. The DOL states that based on projections of wage growth, the threshold should rise to over $51,000 by January 1, 2020, which will be the date of the first increase.

White collar employees - who will meet the new test?

In order to be exempt from overtime, executive, administrative and professional employees have to be compensated on a salary basis of at least $913 per week exclusive of board, lodging, or other facilities, and meet the duties tests.

The overtime exemption applies to any computer employee who is compensated on a salary or fee basis at a rate of $913 per week or more, or on an hourly basis at a rate of at least $27.63 an hour, and meets the duties tests.

Highly compensated employees

The DOL set the total annual compensation level for highly compensated employees (HCEs) at $134,004 per year, up from the current threshold of $100,000. This compensation level is equal to the 90th percentile of earnings of full-time salaried workers nationally.

According to the DOL, to be exempt as an HCE, an employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test. An HCE must customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee and have the primary duty of performing office or nonmanual work.

Counting bonuses and incentive payments toward the salary level

Employers will now be able to count nondiscretionary bonuses, incentive payments, and commissions toward as much as 10 percent of the salary threshold. In order to count, these payments must be paid on a quarterly or more frequent basis. The new rules also permit the employer to make a catch-up payment.

An HCE’s annual compensation may continue to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned, as it has in the past. An HCE must also receive at least the new standard salary amount of $913 per week on a salary or fee basis.

Controlling your costs

Here are a few different options to assist you in controlling your company’s overall costs:

1. Increase the salaries of a group of employees to place them in the exempt category in order to avoid paying overtime.
2. Drop the hourly rates of newly nonexempt employees, so the total cost when paying overtime will be comparable to the salary they were paid when they were exempt.
3. Reclassify the affected employees as nonexempt, but limit their overtime hours.
4. Hire part time workers or temporary employees to offset the reduced workload of employees who are no longer working more than 40 hours per week.
Reduce fringe benefits such as health insurance contributions, 401(k) match, vacation, sick days, etc. to offset the increased overtime costs.
5. Train newly nonexempt employees to use proper timekeeping methods and to prevent them from working unauthorized overtime.

Reclassifying an employee from exempt to nonexempt offers overtime options, but may appear to be a loss of status to the newly nonexempt. While some employees will welcome the chance to receive overtime pay, others may see the need to track actual hours worked as a demotion.

Explain to employees why this change is taking place. Discuss the fact that these standards are set out by the federal government. It is not based on the discretion of the company and it is not a reflection of how the company views the employee. It is not a performance issue. If employees understand that these are objective rather than subjective standards, they will likely feel better about the transition.

Resources

• White House Fact Sheet: Oveview and Summary of Rule
• Wage and Hour Division Overtime Fact Sheet
• DOL/WHD Questions and Answers