Editorial · June 9, 2016
Overtime Pay Rule Changes: What Employers Must Know
The overtime pay rule from the U.S. Department of Labor (DOL) raises the salary threshold for white collar workers who are exempt from overtime. On December 1, 2016, the threshold will move from $455 a week to $913 a week. That is $47,476 a year for a full-year worker. DOL announced the final rule on May 18, 2016, and the Federal Register published it on May 23. DOL says the rule will entitle most salaried white collar workers who earn less than the new threshold to overtime pay.
What the rule changes
The Fair Labor Standards Act (FLSA) guarantees overtime pay for hours over 40 in a workweek. The rate is at least time and a half, which is one and one-half times the worker's regular rate. The Act has a number of exemptions, and an employer does not owe overtime to an exempt worker. The exemptions for executive, administrative, professional, outside sales and computer employees are often called the white collar exemptions.
To qualify for them, a worker must pass a duties test. In most cases, the worker must also be paid a salary of at least a set amount. The final rule changes that amount. DOL made no changes to the duties tests.
DOL set the current threshold in 2004 at $455 a week, or $23,660 a year. It set the new one at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, currently the South.
A second test covers highly compensated employees whose primary duty includes office or non-manual work. They must customarily and regularly do at least one of the exempt duties of an executive, administrative or professional employee. From December 1, their total yearly pay will have to be at least $134,004, up from $100,000. That pay must include at least $913 a week in salary or fees.
DOL will update both thresholds automatically every three years. Each update keeps the standard threshold at the 40th percentile in the lowest-wage Census Region. It keeps the highly compensated one at the 90th percentile nationally. DOL will publish each new amount at least 150 days before it takes effect.
Who is affected, and who is not
DOL says 4.2 million salaried workers will be affected by the rule based on their pay. Under current federal rules, they are not eligible for overtime. DOL estimates that 4.1 million of them will become eligible for overtime pay when they work more than 40 hours in a week. It estimates that 100,000 will get a raise that puts them above the new threshold.
From December 1, a worker covered by the standard salary test will not qualify for the white collar exemption if the pay that counts is under $913 a week. The job duties do not matter in that case. A worker at or above the threshold will qualify only if the duties test is also met.
The salary test does not apply to outside sales employees, teachers, or certain licensed or certified doctors and lawyers. A few groups, such as American Samoa workers and academic administrative staff, have special salary levels. Computer employees paid by the hour have a separate test of $27.63 an hour. The rule does not affect it.
A job title does not settle exempt status, and neither does paying a salary instead of an hourly rate. The employer bears the burden of showing that an exemption applies.
What counts toward the new threshold
The rule lets up to 10 percent of the threshold come from nondiscretionary bonuses, incentive payments and commissions. They must be paid at least quarterly. Until December 1, employers cannot count them toward the standard salary test.
DOL treats promised bonuses as nondiscretionary. Examples include production bonuses and bonuses for quality and accuracy of work. DOL also treats incentive payments, including commissions, as nondiscretionary.
To use this option, a worker must get at least 90 percent of the threshold as salary in each pay period. At $913, that is $821.70 a week. The other $91.30 a week can come from those bonuses and commissions. Suppose salary plus bonuses and commissions for the quarter total less than 13 times $913. The employer may then make one catch-up payment by the next pay period after the quarter ends. That payment counts only toward the quarter just ended. The 10 percent option does not apply to highly compensated employees.
The full threshold also has matching amounts for longer pay periods. They are $1,826 every two weeks, $1,978 twice a month and $3,956 a month. The shortest pay period that meets the test is one week.
What employers can do
DOL says employers will have a choice. They can:
- raise the worker's salary to at least the new threshold;
- pay the overtime premium for extra hours; or
- limit the worker to 40 hours a week.
The rule's Federal Register text lists more examples, such as spreading hours among the staff and hiring new employees. An employer may keep paying a salary to a worker who loses exempt status. But it still owes overtime for hours over 40 in a week. Nondiscretionary bonuses paid to that worker must be included in the regular rate, the base for overtime pay.
A review list before December 1
The overtime pay rule takes effect in fewer than six months. Our editors would take these steps.
- List every salaried worker you treat as exempt, with pay for each pay period, and compare it with the threshold.
- For anyone below the threshold, write down usual weekly hours.
- For anyone at or above it, check the duties too. Salary is only part of the test.
- For highly compensated workers, compare total yearly pay with $134,004.
- Price each choice: a raise, overtime pay or fewer hours.
- Review bonus plans. Only nondiscretionary bonuses, incentives and commissions paid at least quarterly count toward the 10 percent.
- Plan how you will record hours for anyone who becomes overtime-eligible. DOL says no particular form of record is required.
- Check state law. Some states set higher standards, and the higher one applies there.
DOL's rule page lists guidance for private employers, small businesses, nonprofits, higher education employers, and state and local governments. It also links to a webinar sign-up. This note is general information, not legal advice.