Nov. 16, 2016

Friendly Reminder: New Overtime Rules Take Effect December 1

By Catalina M. Avalos

Catalina M. Avalos & Megan L. Janes

Update: This article was written days before the United States District Court for the Eastern District of Texas entered an injunction prohibiting the intended December 2016 changes from taking effect on November 22, 2016. That decision was appealed to the Fifth Circuit Court of Appeals. The main issue is whether the Department of Labor had the authority to increase the salary level without an act of Congress. Since the appeal was filed, the Department of Labor has indicated that it believes it has the authority to change the salary level, but that it does not intend to keep the levels the same as previously proposed. The Department of Labor has solicited public feedback on what the regulation should be changed to, among other related matters.  This article should not be relied upon until this issue is resolved.

If you are not paying your administrative, professional, or executive employees at least $913 per week (the equivalent of $47,476 per year), you may have to pay those employees overtime if they work more than forty hours per week, effective December 1, 2016. Why? The Department of Labor is increasing the minimum salary threshold for the overtime exemption for such employees from the current requirement of at least $455 per week.

As a refresher, employees qualify for the administrative, executive, and professional exemptions from the Fair Labor Standards Act (FLSA), also known as the white collar exemptions, if they meet three tests: (1) salary basis; (2) salary level; and (3) standard duties. This post addresses the implications of the change in the salary level test from $455 per week to $913 per week. [1]

Implications you should be thinking about:

1. December 1 is Thursday and for many employers will fall mid pay period. We recommend making any changes for the entire workweek including the effective date, rather than waiting until the first full workweek thereafter.

2. Starting January 1, 2020, the standard salary levels will be automatically updated every three years. A notice will be posted at least 150 days before each effective date in the Federal Register. Keep an eye out for future changes.

3. Salary deductions are not permitted for exempt employees where an employee is ready, willing, and able to work, but work is not available because of the employer or the operating requirements of its business. This includes closures because of inclement weather.

4. It may be more cost effective for your business to re-classify certain employees as non-exempt and pay them overtime going forward rather than increasing their salary to meet the new requirement, or vice versa. For example:

a. If Annie Admin currently makes a salary of $455 per week, her regular rate of pay is $11.38 per hour. If she normally works 50 hours per week, and is classified as non-exempt, she would make $625.70 (base plus overtime) per week. If you increased Annie’s weekly salary to $913 per week for the overtime exemption, that increase equates to paying Annie roughly 26.8 hours of overtime per week at her current salary of $455 per week. Annie would need to be working approximately 67 hour workweeks in order for the increased salary to match what she would receive in overtime pay as a non-exempt employee at her current salary. It would be less expensive to classify Annie as non-exempt and continue paying her $455 per week, plus the additional overtime she averages of 10 hours per week.

b. If Eddie Exec currently makes a salary of $800 per week, his regular rate of pay is $20.00 per hour. If Eddie is classified as non-exempt, he only needs to work roughly 3.77 hours of overtime per week to exceed the $913 per week threshold. Since Eddie routinely works 45 hours per week, his salary should be increased to $913 per week and his position classified as exempt.

c. If Pattie Prof currently makes $675 per week, she needs to work approximately 9.5 hours in overtime per week to exceed $913 in compensation per week. Pattie averages in excess of 50 hours per week: increase her salary and classify her as exempt.

5. The good news: nondiscretionary bonuses and incentive plans may be used to satisfy up to 10% of the salary level requirement. Bottom line: now is a great time to take a hard look at your overtime exemption classifications and make any needed adjustments before the new rules take effect.

Bottom line: now is a great time to take a hard look at your overtime exemption classifications and make any needed adjustments before the new rules take effect. 

[1] The salary level and salary basis requirements do not apply to outside sales employees, doctors, lawyers, teachers, and certain computer-related occupations paid at least $27.63 per hour. The highly compensated employee salary threshold is also increasing from $100,000 to $134,004 annually.

 

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