New Overtime Requirements: Department of Labor Announces Final Rule

The Department of Labor (“DOL”) has issued its long-awaited, final overtime rule, officially doubling the minimum salary level for executive, administrative and professional employees exempt from the Fair Labor Standards Act (“FLSA”) overtime requirements. 
 
Under the FLSA, overtime regulations require employers to pay time-and-a-half on all hours worked over 40 within a workweek.  Certain white collar employees are exempted from overtime pay if three requirements are met:
 

  1. The employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (this is known as the salary basis test);
  2. The amount of salary paid meets a minimum specified amount (this is known as the salary level test); and
  3. The employee’s primary job duties involve executive, administrative, or professional duties (“EAP”) as defined by the regulations (this is known as the duties test). 

The salary level is currently $23,660 per year; this is what is changing, and in a big way.  The new rule has more than doubled this salary floor, increasing the minimum salary level to $47,476 per year (an increase from $455 per week to $913 per week) effective December 1, 2016.  This means that employees who are paid a salary less than this amount will be nonexempt and eligible for overtime pay after December 1, even if they are paid a salary and meet the duties test.  The threshold for “highly compensated employees” will also be raised from $100,000 to $134,004 (although Oregon employers should be mindful that Oregon’s wage and hour law does not provide for an exemption for “highly compensated employees”).
 
After December 1, 2016, the salary level will be automatically updated every three years (the initial proposal had proposed an annual automatic adjustment).  Updates will be calculated at the 40th percentile of earnings of full-time salaried workers in the lowest income region of the country.  The first automatic update will take place on January 1, 2020, and, based on current projections of wage growth, would increase the minimum salary level to over $51,000. 
 
In response to concerns voiced by employers, the DOL is not changing the duties test (the existing job duties required to qualify as exempt). 
 
In addition, the salary basis test is also modified to allow employers to count nondiscretionary bonuses and commissions which are paid at least quarterly as partial satisfaction of the threshold (up to 10% of the required salary level).  Those employers who pay significantly larger bonuses will still be capped at 10% and will have to meet the remainder of the salary level requirements with traditional salary payments. 
 
To comply with the final rule, employers may choose to increase salaries to meet the new minimum threshold, or pay a non-qualifying salary along with overtime for hours worked in excess of 40 (and meet other requirements for nonexempt status such as recordkeeping), or reduce hours worked by their employees to avoid overtime.  In many cases, employers will find their best choice is to increase the salary. 
 
For employees who will have to be reclassified as nonexempt, employers will also need to begin tracking the hours worked and providing meal and rest breaks.  In addition, if employers choose to transition previously-exempt employees to non-exempt status, they may find themselves reevaluating the kind of work flexibility previously offered which is not typically available to non-exempt workers, such as working from home, performing certain tasks before or after work, or having access to workplace systems outside of regular work hours.     
 
Employers should begin their evaluations of positions, duties, salaries, and potential for overtime as soon as possible, starting with those positions currently classified as exempt but paid below the new salary level.  An evaluation of how many hours are typically worked by employees in those positions can provide a basis to compare whether it is better economically to raise the salary or to pay overtime (or even to offer a lower base hourly rate to offset anticipated overtime costs).  Aside from the cost, employers should also consider the decreased flexibility associated with transitioning an employee to non-exempt status, the administrative costs involved in tracking hours and schedules and ensuring employees take their required breaks, and the potential impact on morale in moving an employee from an exempt to non-exempt classification.
 
Employers also need to remember that employees meeting the new salary threshold must still meet the requirements for primary duties performed. 
 
Please contact us for any questions or needed assistance, and be sure to bookmark the Department of Labor’s page on the overtime rule, which provides specific guidance for businesses including for non-profit, small business, higher education and state and local governments, and offers links to upcoming Department of Labor webinars on the new rules.

Electronic Alerts are written by Barran Liebman attorneys for their clients and friends. Alerts are not intended as legal advice, but as employment law, labor law, and employee benefits announcements.