How the DOL’s New Overtime Regulations Affect You
On May 18, 2016, the US Department of Labor (DOL) issued a rule that doubled the salary that employees must make to be exempt from the minimum wage and overtime pay requirements of the Fair Labor Standards Act (FLSA) under the “white collar” or EAP exemption for administrative, executive, and professional employees. In addition to the salary test, employers must also apply a duties test to ensure that their employees qualify for the “white collar” exemption, but the DOL did not make any changes to the duties test.
Under the new rule, which takes effect December 1, 2016, the standard salary increases from $455 per week to $913 per week (increasing from an annual salary of $23,660 to $47,476 for a full-year worker). The salary for highly compensated employees (who must also receive at least the new standard salary amount of $913 per week on a salary or fee basis) increases from $100,000 to $134,004. Under the final rule, automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
The DOL’s Fact Sheet on the new rule notes that the DOL also updated the special salary level for employees in American Samoa (to $767 per week) and the special “base rate” for employees in the motion picture industry (to $1,397 per week).
Why the DOL Passed the New Rule
The salary thresholds were last updated in 2004. In its proposed rule issued in July 2015, the DOL pointed out that the $23,660 figure was below the poverty threshold for a family of four. In addition, that salary level was below the 10th percentile of earnings of full-time salaried workers.
The DOL updated the overtime requirement after President Obama issued a 2014 Presidential Memorandum stating that regulations regarding exemptions from the FLSA’s overtime requirement, particularly the “white collar” exemptions, had “not kept up with our modern economy.” President Obama directed the Secretary of Labor to propose revisions to modernize and streamline the overtime regulations.
In its Overview and Summary of Final Rule, the DOL notes:
The white collar exemption was originally meant for highly-paid workers who had better benefits, job security and opportunities for advancement. Unfortunately, when left unchanged, the salary threshold is eroded by inflation every year. It has only been updated once since the 1970s—in 2004, when it was set too low. As a result, the threshold fails to help employers identify workers who are entitled to overtime pay, and it has left millions without overtime protections to which they should be entitled. This outdated salary threshold provides overtime protections to just 7 percent of full-time salaried workers today based on their pay, compared with 62 percent in 1975.
The DOL’s blog post on Who Benefits from the New Overtime Rule estimates that the updates will impact 4.2 million workers. More than half (56%) are women, 61% are age 35 or older, and 1.5 million are parents of children under 18.
Changes from the Proposed Rules
The DOL received over 270,000 comments on its proposed rule. According to the DOL, that feedback helped to shape the final rule. As shown in its Questions and Answers page, the DOL made the following changes from the proposed regulations:
Salary: In the proposed regulations, the minimum salary was going to be set at the 40th percentile of earnings of full-time salaried workers nationally (which would have been $970 a week). The final rule sets it at the 40th percentile of earnings of full-time salaried workers in the lowest-wage US Census region, which is currently the South.
Adjustments: The proposed rule would have adjusted the salary and compensation levels every year. Under the final rule, they will be adjusted every three years.
Bonuses: The proposed regulations made no provision for counting nondiscretionary bonuses and commissions in the standard salary. Based on feedback, the DOL amended the final rule so that up to 10% of the standard salary can come from nondiscretionary bonuses, incentive payments, and commissions, if they are paid at least quarterly.
Duties test: In its proposed rule, the DOL asked for comments on whether the duties tests are working as intended. Ultimately, the DOL made no change to the duties tests.
Actions to Block the Rule
On March 17, 2016, US Senators Lamar Alexander (R-TN) and Tim Scott (R-SC) and Representatives Tim Walberg (R-MI) and John Kline (R-MN) introduced the Protecting Workplace Advancement and Opportunity Act to nullify the proposed overtime rule, require the Secretary of Labor to conduct an analysis of the rule’s impact, and prohibit the promulgation of a rule that contains automatic updates to the salary threshold.
On May 18, 2016, Senator Alexander announced that he would introduce a Congressional Review Act resolution to block the final rule.
What You Should Do
Employers must assess how each employee is paid (salary basis test), how much the employee earns (salary level test), and whether the employee primarily performs the kind of job duties that Congress meant to exclude from the law’s overtime protections (duties test).
Specifically, the DOL explains in its Guidance for Private Employers on Changes to the White Collar Exemptions in the Overtime Final Rule that employees must satisfy three criteria to be exempt from overtime requirements:
(*) They must be paid on a salary basis that is not subject to reduction based on quality or quantity of work
(*) Their salary must meet a minimum salary level
(*) Their primary job duties must involve the kind of work associated with exempt executive, administrative, or professional employees
In its Plenty of Options with New Overtime Rule blog post, the DOL points out that employers can comply with the new rule by:
(*) Paying time-and-a-half for overtime work
(*) Raising workers’ salaries above the new threshold
(*) Limiting workers’ hours to 40 per week
(*) Using a combination of the above options
The DOL’s “Options” blog post also notes that the FLSA does not require employers to choose between complying with basic labor standards and allowing employees to have flexible work arrangements and opportunities for advancement. Employees and employers can agree on when, where, and how the employee will work. In addition, there’s no requirement that employees “punch in” and “punch out.”
Update: On November 22, 2016, a federal judge in Texas blocked the overtime rule from taking effect on December 1, 2016.