New Overtime Rules: What You Need to Know

May 31, 2016 // ADP®
New Overtime Rules

The Department of Labor (DOL) issued changes to the overtime exemptions under the Fair Labor Standards Act (FLSA). The new rule makes substantial increases to the minimum salary requirement for white collar exemptions.

Background

The FLSA requires covered employers to pay “non-exempt” employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. While most employees are non-exempt, the FLSA includes exemptions for certain administrative, professional, executive, highly compensated, outside sales, and computer professional employees. These employees are known as “exempt” employees.

To be considered exempt, these employees must generally satisfy three tests:

  1. Salary-level Test. Currently, the employee must earn at least $455 per week for the executive, administrative, and professional employee exemptions.*
  2. Salary-basis Test. The employee must receive their full salary in any week they perform work, regardless of the quality or quantity of the work.
  3. Duties Test. The employee’s primary duty must meet certain criteria.

There is also an exemption for “highly compensated” employees who are paid a total annual compensation of at least $100,000. These employees are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the exempt duties of an executive, administrative, or professional employee.

*Note: The computer employee exemption has its own salary-level test. The outside sales employee exemption has no salary-level test.

Proposed Regulations: New Salary Level Test

Under the new rules, the salary threshold for the executive, administrative, and professional employee exemptions would be set at the 40th percentile for full-time, salaried employees using data published by the Bureau of Labor Statistics (BLS). In 2016, the DOL projects this amount to be about $913 per week (or $47,476 per year).

The salary threshold for highly compensated employees would also increase. The current threshold is $100,000 per year. The proposed rules would raise the salary threshold for highly compensated employees to the 90th percentile, which was $134,004.

Automatic Updates

The new rules would establish automatic annual increases to the two salary thresholds every three years, beginning on January 1, 2020.

No Proposed Changes to Duties Tests:

The DOL did not propose any specific changes to the duties tests. However, the Department asked for public comments on whether the duties tests are working as intended.

Here are some questions the DOL raised:

  • What, if any, changes should be made to the duties tests?
  • Should exempt employees be required to spend a minimum amount of time performing their primary duties? If so, what should that minimum be?
  • Does the single duties test for each exemption category appropriately distinguish between exempt and non-exempt employees?

Timeline:

During the three month public comment period, the DOL received over 270,000 comments. The new rules became final May 18, to take effect on December 1, 2016.

Compliance Recommendations:

Employers should evaluate the impact of the new rules on their business. The DOL estimates that as many as 4.6 million workers could become newly eligible for overtime. Consider these action steps:

Review

Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.

Reclassify

If your exempt employees fall below the new salary threshold, you have two options:

  1. Re-classify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek; or
  2. Raise their salary to meet the new requirement.

Budget for salary increases and/or increased overtime costs.

Prepare

In response to the new rules, it is possible that some states will update their salary threshold as well. If this is the case, covered employers must comply with the higher minimum salary requirement.

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog.
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