Department of Labor Announces new Rule Increasing Overtime Payment Obligations

On May 18, 2016, the Department of Labor announced a rule change that will allow over four million of employees to potentially qualify for increased pay for overtime hours. The new rule, called the Final Rule, will take effect on December 1, 2016.

The Fair Labor Standards Act (“FLSA”) requires paid overtime for all employees who work more than 40 hours in a week of at least one and one half of their normal hourly rate, with a few important exemptions. Exempt employees include certain executive, administrative, professional, computer, and highly compensated employees, otherwise known as the “White Collar Exemptions.” Currently, in order to qualify, these employees must be paid at least $455 per week or $23,660 annually. The Final Rule more than doubles that threshold, raising it to $913 per week or $47,476 annually. This figure is equal to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region – currently the South.

A higher threshold salary exists for strictly “highly-compensated employees,” or those that meet some (but not all) of the qualitative requirements for the white collar exemptions, and have a high enough salary to be considered exempt. The previous threshold of $100,000 is raised to $134,004 under the Final Rule, a figure equal to the 90th percentile of full-time salaried workers national wide.

The Final Rule also allows employers to satisfy up to 10% of salary requirements with non-discretionary bonuses and incentive payments, including commissions. Notably, such payments must be made on a quarterly or more frequent basis. Finally, the new rule establishes that the minimum required salary level for the base white collar exemption will automatically update every three years based on the 40th percentile of full-time salaried workers in the lowest income Census Region, with the first update taking place on January 20, 2020. The higher threshold will increase to meet the 90th percentile of annual earnings of full-time salaried workers nationally, and will adjust on the same schedule.

Employers have a few options to address the new overtime payment obligations. The first option is to raise salaries of affected employees to remove them from the affected range. Depending on the circumstances, this may actually be the most economical option. Similarly, employers can also consider instituting or altering benefits, including bonuses and incentive payments, in order to raise effective salaries and remove employees from the applicable range. Employers could alternatively choose to adjust work schedules and hiring practices to reduce or eliminate overtime hours worked by newly affected employees. Finally, of course, employers could elect to take no action and pay overtime in accordance with the Final Rule.

There may be legal ramifications for whatever choice an employer makes. For advice or assistance in protecting your business, please contact any of the labor and employment attorneys at Eckland & Blando LLP.