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

The federal Department of Labor (DOL) has released final changes to the overtime regulations. These changes are effective December 1, 2016. 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 by December 1, 2016, and will then be entitled to overtime for any hours worked over 40 in a week.

Under the final regulations, employers will now be able to count nondiscretionary bonuses, incentive payments, and commissions toward as much as 10% of the salary to determine whether they have reached the salary threshold for exemption from overtime. 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.

A highly compensated employee’s (HCE) annual compensation may continue to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned, as it has in the past. The DOL set the total annual compensation level for HCEs at $134,004 per year, up a threshold of $100,000. An HCE must receive at least the new standard salary amount of $913 per week on a salary or fee basis.

In addition, 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.

Nondiscretionary vs. Discretionary

Under the federal Fair Labor Standards Act (FLSA), bonus payments are divided into discretionary and nondiscretionary types. Only nondiscretionary bonuses, incentive payments, and commissions may count toward as much as 10% of the salary threshold beginning in December 2016.

Bonuses are discretionary if:

• Both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer; and
• The bonuses are not paid under any prior contract, agreement, or promise causing the employee to expect such payments regularly.

Bonuses are nondiscretionary if the employer promises, contracts, or agrees to pay a bonus to the employee. Nondiscretionary bonuses include:

• Bonuses that are promised to employees upon hiring.
• Bonuses that are the result of collective bargaining.
• Bonuses that are announced to employees to induce them to work more steadily, more rapidly, or more efficiently.
• Attendance bonuses.
• Individual or group production bonuses.
• Bonuses for quality and accuracy of work.
• Bonuses that are announced to employees to induce them to remain with the firm.
• Bonuses contingent upon the employee's continuing in employment until the time the payment is to be made.

Distinction—Bonuses included in calculation of regular rate of pay

Employers need to recognize the distinction between bonuses that may count toward as much as 10% of the salary threshold, and bonuses that are included in an employee’s regular rate of pay for the purpose of determining weekly overtime.

Nondiscretionary bonuses may be included in an employee’s regular rate of pay for the purpose of determining the weekly overtime amount owed to the employee, while discretionary bonuses may not be included. There is not a 10% limit on including nondiscretionary bonuses in an employee’s regular rate of pay for the purpose of determining overtime.

Exceptions from the requirement that bonuses be included in an employee's regular rate of pay

The FLSA provides for several narrow exemptions from the requirement that bonuses be included in an employee's regular rate of pay for the purpose of determining the amount of weekly overtime owed. The onus is on the employer to prove that a payment meets one of the exemption requirements. The exemptions include:

• Gifts, or payments in the nature of gifts, made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency.
• Vacation, holiday, or sick leave pay; payment for failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, and other similar payments to an employee that are not made as compensation for his or her hours of employment.
• Sums paid in recognition of services performed during a given period if either:
  1. both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not under contract, agreement, or promise causing the employee to expect such payments regularly; or
  2. the payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan, if the amounts paid to the employee are determined without regard to hours of work, production, or efficiency; or
  3. the payments are talent fees paid to performers, including announcers, on radio and television programs.
• Contributions to a trustee for retirement, life, accident, or health insurance or similar benefits for employees.
• Premium overtime pay.
• Premium pay for working holidays or weekends.
• Extra compensation provided by a premium rate paid to the employee under an employment contract or collective-bargaining agreement.
• Certain stock option compensation that meets the requirements of 29 USC 207(e)(8).

DOL intends to simplify the rules

With this final rule increasing the salary threshold and allowing bonuses to count toward as much as 10% of the salary threshold, the DOL seeks to ensure that FLSA’s intended overtime protections are fully implemented and to simplify the identification of nonexempt employees, thus making the executive, administrative, and professional employee exemption easier for employers and workers to understand and apply.

Additional resources

• Snapshot—5 key points on the DOL’s new overtime regulations
• Overtime Rules Calculator
• Safe Harbor for Improper Deductions Checklist