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Federal Department of Labor Updates Overtime Rules

Posted on June 13th, 2016 Read time: 3 minutes

By Hilary Hager, Corporate Counsel

On May 18, 2016, the U.S. Department of Labor issued final regulations significantly changing the rules governing which employees can be classified as exempt from overtime laws.  Under the Fair Labor Standards Act, an employee must satisfy a three-part test to qualify as exempt.  They must:

  • Be paid on a salary basis (in other words, be paid the same amount each pay period regardless of how many hours they work); and,
  • Meet a specific minimum salary level (does not apply to outside sales, teachers, lawyers or doctors); and,
  • Perform job functions that meet one of several “duties” test (for example, executive or professional)

The new regulations, which go into effect on December 1, 2016, address the second prong of the test – minimum salary threshold.  Under these regulations:

  • Exempt employees must earn at least $913 per week, or $47,475 annually.  This figure more than doubles the current minimum of $455 per week.  (Many states already set minimum salary requirements higher than current federal levels but none as high as the new rules).  Non-discretionary bonuses, incentive payments and commissions may satisfy up to 10% of this amount, as long as they are paid at least quarterly.
  • Employees exempt under the highly compensated employee exemption must earn at least $134,004 per year (compared to $100,000 under current law); and,
  • Minimum salary levels will be updated every three years starting in January of 2020.

Implementing the new rules may prove to be more complicated than anticipated so employers would be wise to start planning now. So what should employers do to prepare?

  1. Identify employees affected by the rule changes.  Audit company payroll records to determine if any employees currently classified as exempt earn less than $913 per week.  Also, check whether you have exempt employees earning between $100,000 and $134,004 per year who may have been classified as exempt under the highly compensated employee exemption.
  2. Decide how your company will pay an employee if they will no longer qualify as exempt under the new rules,.  You will want to consider, among other things, potential costs to your business and the impact your decisions may have on employee morale.  Be sure to also consider what affect re-classification might have on benefits eligibility.

Employers have a few options, including:

  • Re-classifying the employee as non-exempt.  An employer might choose to keep the employee’s salary at the same level and control costs by limiting the amount of overtime the employee works.  Or, after determining how much overtime the employee typically works, the employee’s salary can be adjusted downward so that salary plus overtime roughly equals their currently salary. Several free on-line calculators are available to help with the math.
  • Adjusting wages – if an employee is close to the new cut-off levels, the easiest solution may be to simply raise the employee’s salary to meet the new cut-off.  If choosing this option, employers may want to take the opportunity to do a job assessment to ensure the employee’s duties haven’t changed since the initial exempt assessment.
  • Review company policies and procedures to ensure they adequately address areas such as meal and rest breaks, overtime policies, use of mobile devices after hours, working off-the-clock, timekeeping, travel time, benefits and payroll changes.
  • Communicate any changes to managers, supervisors and employees.  Before making changes, carefully plan what, how, when and by whom, information will be communicated.
  • Train re-classified employees and their supervisors.   Previously exempt employees and their supervisors will likely need training on their obligations relating to time tracking, approval of timecards, meal and rest breaks, working from home, etc.  Effective training and follow up will be key to preventing unintended wage and hour violations.

The above article is for informational purposes only and is not legal advice.  You should consult with your attorney to see if any of the information provided here applies to your organization.

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