Window to the Law: New DOL Overtime Rules

Beginning December 1, 2016, the minimum salary levels will increase significantly in order to claim the Executive, Administrative and Professional Exemption and Highly Compensated Employee Exemptions. Employers will need to meet this increase in order to continue to claim the exemptions from the Fair Labor Standards Act’s minimum wage and overtime pay obligations.

The new rule does not change the duties test for these exemptions, however the rule does effectuate three major changes that all employers should be aware of:

First, the minimum salary levels for exemptions will increase:

As of December 1, 2016, any employee classified under the Executive, Administrative and Professional Exemption must make a minimum of $913 a week, which is a minimum of $47,476 annually. And employees classified under the Highly Compensated Employee Exemption must be paid a minimum of $134,004 annually.

These numbers represent a substantial jump from the current minimum salary levels, which are set at $455 a week and $100,000, respectively.

Second, the exemptions’ minimum salary levels will automatically be updated every three years, and the Department of Labor will provide 150 days’ prior notice of the updated salary levels. The first update is scheduled for January 1, 2020.

Prior to the new Overtime Rule the minimum salary levels had not changed since 2004, over ten years ago, so the automatic update provision will ensure that the minimum salary levels keep pace moving forward.

And last, the rule will now allow employers to satisfy up to 10% of the minimum salary level for the Executive, Administrative and Professional Exemption through the payment of nondiscretionary bonuses and incentive payments, when these payments are made no less than quarterly. It is important to keep in mind that the 10% allowance pertains only to nondiscretionary payments, which are forms of payments that are promised to employees, for example, to induce them to work more efficiently or remain with the company. This is opposed to a discretionary payment, such as a holiday bonus, which is paid at the complete discretion of the employer, and may not be counted towards meeting the exemption’s minimum salary thresholds.

The Highly Compensated Employee Exemption already allows an employee’s total annual compensation to be calculated by including commissions, nondiscretionary bonuses and compensation without a 10% cap or quarterly payment requirement. However, keep in mind that the new rule does require a highly compensated employee to be paid no less than the standard $913 a week.

In anticipation of the December 1, 2016 effective date, employers should begin preparing for how best to respond to the new rule.

As a first step, employers should assess whether its current exempt employees will meet the new minimum salary levels.

If an employee will not meet the new minimum salary level, employers have the choice of either raising the employee’s salary in order to meet the rule’s new thresholds or reclassifying the employee as non-exempt.

Remember, claiming an exemption under the Fair Labor Standards Act is optional. But, keep in mind, an employer must pay overtime for all hours a non-exempt employee works over 40 in any given work week.

Converting an employee from exempt to non-exempt status may make sense where the employee rarely works more than 40 hours in a work week. But, it’s understandable that employers may be concerned about the potential financial impact this reclassification may have on their bottom line.

Employers can use a number of strategies to mitigate the need for employee overtime:

• For instance, an employer may consider shifting certain duties or responsibilities from one employee to an employee with a lighter workload.
• Hiring additional part-employees or contractors and paying these workers straight pay may be less expensive than paying overtime.
• And eliminating tasks that don’t add sufficient value, such as a nonexempt employee’s presence at a staff meeting or attendance at certain events, may reduce the overtime potential.

Remember, the new Overtime Rule boils down to one essential thing: employers must review employee salaries to determine if they must increase exempt employees’ pay in order to claim the exemption or whether they must reclassify employees to nonexempt and pay overtime when required.

The December 1, 2016 deadline is just a few short months away, so begin your assessment now in order to prepare a response that makes the most sense to your business.

For more details about the rule, please refer to the NAR Legal Affairs “Department of Labor: New Overtime Rule” Guidance, which was published July 2016.