Friday July 22, 2016
Changes in the rules for overtime pay
posted by Thomas J. Banaszynski
Tags: In the news
The U.S. Department of Labor has changed the rules for overtime compensation for employees. The Fair Labor Standards Act (FLSA or Act) guarantees a minimum wage for employees for all hours worked during the workweek and an overtime premium pay of not less than one and one-half times the employee’s regular rate of pay for over 40 hours worked in a workweek. While these protections extend to most workers, the FLSA does provide a number of exemptions. In this Final Overtime Rule, the Department of Labor (Department) revises the regulations under the FLSA implementing the exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales, and computer employees. These exemptions are frequently referred to as the “while collar” exemptions.
On May 18, 2016, President Obama and Secretary of Labor Perez announced the publication of the Department of Labor’s final rule updating the overtime regulations, which will automatically extend overtime pay protections to over 4 million workers within the first year of implementation. This long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.
The Department of Labor, Wage and Hour Division published a Notice of Proposed Rulemaking (NPRM) in the Federal Register on July 6, 2015 (80 FR 38515) and invited interested parties to submit written comments on the proposed rule at www.regulations.gov by September 4, 2015. The Department received over 270,000 comments in response to the NPRM from a variety of interested persons and entities. The feedback the Department received helped shape the Final Rule.
A Little History of the Overtime Pay Exemptions
In 1938, the Department of Labor issued the first regulations defining the scope of the “white collar” exemption. Since 1940, the regulations implementing the exemption have generally required each of three tests to be met for the exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties” test). While payment of a salary does not make an employee ineligible for overtime compensation, the Department has nonetheless long recognized the salary level test as the best single test of exempt status for white collar employees. The salary level test is an objective measure that helps distinguish “white collar employees” who are entitled to overtime from those who may be bona fide executive, administrative, or professional (EAP) employees.
The Department has updated the salary level requirements seven times since 1938, most recently in 2004 when the salary level an employee must be paid to come within the standard test for EAP exemption was set at $455 per week ($23,660 per year for a full-year worker), which nearly tripled the $155 per week minimum salary level required for exemption up to that point.
The 2004 Final Rule also created an exemption for highly compensated employees (HCE), which imposes a very minimal duties test but requires that an employee must earn at least $100,000 in total annual compensation.
On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department to update the regulations defining which white collar workers are protected by the FLSA’s minimum wage and overtime standards.
Key Provisions of the Final Rule
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:
1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentile and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The effective date of the final rule is December 1, 2016.
The initial increases to the standard salary level (from $455, $23,660 annually, to $913 per week, $47,476 annually) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.