Complying with the New Overtime Pay Rule

DOL regulations to take effect soon

The “final rule” on overtime pay, long anticipated by the business sector, was issued by the U.S. Department of Labor (DOL) this spring. However, changes in the regulations do not formally take effect until December 1, 2016. Because of that, employers still have time to make the adjustments necessary to be in full compliance.

The main rules for overtime pay are included in the Fair Labor Standards Act (FLSA). Notably, employees who are not exempt under the FLSA must be paid the overtime rate of one-and-a-half times their regular pay rate for hours worked in excess of 40 hours. Employers may be penalized for violating these rules.

Under long-standing regulations, the DOL generally requires each of these tests to be met for employees to be exempted from overtime pay:

  • The salary basis test: The employee must be paid a predetermined salary that is not subject to reduction because of variations in the quality or quantity of work performed.
  • The salary level test: The amount of salary paid must meet a minimum specified amount.
  • The duties test: The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the DOL regulations.

Prior to issuing the new final rule, the DOL had last updated these regulations a dozen years ago. At that time, it established the weekly salary level at $455—which works out to $23,660 a year—in addition to other changes, including carving out an exemption for highly compensated employees.

The Obama administration had set a goal of increasing the salary level test threshold to the point where it would be if inflation adjustments had been made over time. Ultimately, the DOL raised the current weekly level to $913—or $47,476 a year—which is more than double the previous level. As things stand now, workers earning less than this amount will be entitled to overtime pay as nonexempt employees, regardless of their job responsibilities.

The new final overtime rule doesn’t stop there. The threshold will be adjusted for inflation every three years, beginning January 1, 2020.

Under yet another change, the annual pay threshold for highly compensated employees was increased from $100,000 to $134,004. Employees earning above this threshold, regardless of whether their jobs would be classified as non-exempt under the “duties” test, may still be treated as exempt and are therefore ineligible for overtime pay.

Being forewarned is being forearmed: With the looming deadline of December 1, 2016, employers still have time to institute changes to bring their organizations into full compliance. Be mindful that a substantial number of workers who previously didn’t qualify for overtime pay will be eligible going forward.

The new final rule may force employers to re-examine their payroll responsibilities and characterization of jobs. Rely on your professional business advisers for guidance.

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