As of December 1, 2016, the number of employees eligible for overtime will dramatically increase due to an update to the Federal Labor Standards Act (FLSA). Previously under the FLSA, employees who made over $23,600 per year and met certain other requirements were exempt from mandatory overtime compensation. Under the revised regulations, the threshold figure will jump to $47,476 per year. This increase is estimated to render an additional 4.2 million workers eligible for mandatory overtime. The stated purposes of the amendments were to: 1) update the salary threshold to match current economic realities and thereby bring the regulations in line with the original intent of the FLSA; and 2) to make the rules easier for workers and businesses to understand and apply. By increasing the number of workers eligible for overtime pay, employers will have significant decisions to make regarding their employees’ wages, hours, and duties.
What is the Fair Labor Standards Act?
The Fair Labor Standards Act is a federal law that governs the minimum wage, overtime pay, recordkeeping, and child labor standards for all full-time, and part-time workers in the private sector and in Federal, State, and local governments. One purpose of the FLSA is to ensure that all workers are fairly compensated. Generally speaking, the Act requires employees be paid at least the federal minimum wage for all hours worked, up to 40, in a given week. Any hours above 40 worked in a given week must be compensated as overtime pay at no less than one and one-half times the employee’s regular rate of pay.
While the rules apply to most employees, there are workers who are exempted from the FLSA’s protections. To be exempt, the employee’s specific job duties and salary must meet all the requirements of the regulations.
Currently, with few exceptions, employees who are paid a salary of at least $23,600 per year ($455 per week) and whose jobs can be described as executive, administrative, or professional are exempt from overtime pay – this is referred to as the white-collar exemption. Likewise, employees who are paid more than $100,000 per year and who regularly perform an executive, administrative, or professional duty (“highly compensated employees”) are exempt from the overtime requirement even where they might not otherwise meet all the specific requirements under a particular classification.
Job titles do not determine whether a job position will be exempt, rather, an examination must be made of the actual duties of an employee to determine
if her position may be considered executive, administrative or professional under the law. Employers are advised to consult with their attorney to
fully assess whether or not its employees’ duties fall under the exemptions.Generally speaking, the White Collar exemption recognizes that employees
who reach a certain level or compensation do not need the same wage protections as lower-wage workers and seeks to avoid putting a substantial burden
on employers. However, the salary threshold has been eroded by inflation and increases in costs of living through the years, and employees are not
being compensated proportionately to the rising market. Therefore, advocates claim that the current overtime exemption threshold needs to be adjusted
upward to update the law to fit its original purpose of ensuring adequate pay for workers.
The Overtime Rule Update
With the need to increase the salary threshold to keep up with economic realities, the overtime rules are being amended. The revised regulations are expected to extend overtime eligibility to an estimated 4.2 million full-time workers and are intended to make the rules more clear for workers and employers. Specifically, as of December 1, 2016, the updated regulations will:
- • Raise the eligibility requirement for overtime pay from $455 per week ($23,600 per year) to $913 per week ($47,476 per year). This means that 35% of full-time salaried workers will be automatically entitled to overtime based solely on their salary.
- • Raise the eligibility requirement for those exempt as “highly compensated employees” to the 90th percentile of full-time salaried workers nationally, or from $100,000 to $134,004 per year.
- • Automatically update the salary threshold every three years, starting January 1, 2020, based on wage growth over time. Each update will increase the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020. For “highly compensated employees,” the threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.
- • Allow up to 10% of the salary threshold to be met by non-discretionary bonuses, incentive pay, or commissions, provided they are made on at least a quarterly basis.
Employers are not required to convert a salaried employee who gets paid less than the salary threshold to an hourly status. Employers can continue to pay the nonexempt employee on a salary basis and pay overtime for all hours worked over 40 in a workweek.
Employer compliance with the Overtime Rule
The Department of Labor does not dictate any method of compliance and employers have the discretion to decide how they will comply with the revised regulations. There are numerous options for compliance including:
- • Continue paying the employee’s current salary in addition to paying overtime. This option is most viable where the employee occasionally works overtime due to spikes in the workload. Employers can more carefully budget and plan for the increased pay during those periods.
- • Raise the employee’s salary to maintain their exempt status. If the employee’s salary is above $47,476 per year and his or her duties meet the duties test (described as executive, administrative or professional), the employee is exempt. This option is practical if the employee who works 40 hours per week is already being paid close to the $47,476 salary requirement.
- • Evaluate and modify the employee’s workload. The need for overtime could be eliminated where employers appropriately distribute the workload and allow for adequate staffing levels.
- • Adjust employee wages. Employee’s earnings can be adjusted to reallocate it between regular wages and overtime so the total amount paid remains roughly the same. This option is preferred where employees work a consistent and a small number of overtime hours. Note that employers are prohibited from reducing an employee’s hourly wage below the federal or applicable state-level minimum wage (whichever is higher).
- The method an employer chooses will be dependent on its particular circumstances with particular consideration given to the number of employees, how
much employees currently earn, and how often employees work overtime. Additionally, employers and employees should be aware that while federal
law sets minimum national standards, states may impose heightened requirements under their own laws, so it is essential to understand any applicable
local rules and regulations. Compliance with the FLSA does not guarantee compliance with state or local laws. And finally, as every employer has
its own unique situation, it is always advised to consult with an attorney to discuss a business’s particular needs.
This information is not intended to provide or be construed as legal advice. Before taking steps to comply with the new overtime regulations, please consult with an attorney to fully assess your unique situation.