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

The federal Department of Labor’s (DOL) overtime regulations were updated and modernized in May 2016. December 1, 2016, is the effective date of these regulations. The alarming wave of Fair Labor Standards Act (FLSA) enforcement activity shows a distinct trend and emphasis on FLSA and compensation-related lawsuits brought by the DOL.

Misclassifying an employee as exempt or nonexempt is one of the most common errors committed by employers. These simple errors result in lost overtime for employees who are entitled to overtime pay under the law and millions of dollars in damages for employers. Undoubtedly, these new rules will increase this activity further. Below is a brief snapshot of the changes affecting employers.

1. Salary level increase. 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 and means many more employees will be entitled to overtime beginning December 1, 2016.
2. Special salary levels. The DOL is increasing the 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.
3. Automatic updating every 3 years. The DOL will automatically update the standard salary and compensation levels every 3 years going forward. 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.
4. Highly compensated employees (HCEs). The DOL set the total annual compensation level for 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 and will be automatically updated every 3 years.
5. Bonuses and incentive payments. 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 and meet a minimal duties test.)

The DOL has estimated that more than one-half of employers have incorrectly classified employees under the FLSA. In each of these cases, only one employee complaint to the DOL or an attorney concerning overtime is required to open a DOL investigation of the entire company’s classification methods or ignite a private lawsuit against the company.

The strong drive to decrease employer costs and increase productivity has made exempt employees, who can work unlimited hours without overtime, more attractive. As a result, there is a temptation for employers to classify workers as exempt, when by law they should be classified as nonexempt.

Understanding the FLSA is not easy. The law presents a maze of rules, job categories, and qualifications that are vague and very difficult to understand. Beyond merely understanding the regulations is the practicality and cost of applying them to a group of employees. For this reason, many employers fail to correctly apply the FLSA, nor do they utilize the right resources, legal or otherwise, to ensure that they have properly classified their employees.

Conduct an internal audit now. Make sure you have shifted all qualifying employees to nonexempt status under the new overtime regulations by December 1, 2016. You will preempt the DOL and bring your classifications into compliance before it is too late.