On May 18, 2016, the Department of Labor (“DOL”) issued a
final rule on overtime exemption likely to impact more than 4 million American
workers and their employers. The DOL doubled the salary “white collar”
employees must earn to be exempt from overtime and minimum wage requirements,
raising the threshold from $455 per week ($23,660 per year) to $913 per week
($47,476 per year). The final rule also raises the exemption threshold for
“highly compensated employees,” who are still subject to a more minimal duties
test, from $100,000 to $134,004 annually.
This dramatic shift is estimated to increase overtime wages
by $10 billion over 10 years and likely has some employers as concerned as
worker advocates are elated.
So what does this
final rule mean to affected employers, and how can they prepare for the changes
set to take effect
on December 1, 2016?
For employers to establish that an employee is exempt from
overtime requirements under the “white collar exemption,” three criteria must
- The employee must be paid on a salary (not
hourly) basis not subject to reduction based on quality or quantity of work;
- The employee must be paid at least $913 per week
or $47,476 annually (the new “Salary Level Test”); and
- The employee’s primary job duty must involve the
kind of work that qualifies as exempt, that is, they are employed in a bona
fide executive, administrative, professional or computer position, as defined
by the regulations.
The final rule issued by the DOL only modifies the Salary
Level Test above; the other two criteria are unchanged.
In applying the above criteria, employers must remember that
neither job title alone nor receiving a salary in excess of the established
thresholds is sufficient to establish that an employee is exempt from overtime
pay. All three of the criteria must be met to establish the exemption. Employers
may be pleased to learn, however, that under the new rule up to 10% of an
employee’s annual bonuses and/or commission can now be counted toward meeting
the salary thresholds to establish exemption, so long as such bonuses and/or
commissions are paid at least on a quarterly basis. In addition, if an employee
does not earn enough in non-discretionary bonuses or incentive payments
(including commissions) in a quarter to retain the salary level for exempt
status, an employer may provide a “catch up” payment at the end of the quarter.
Affected employers may need to make some important choices
in order to comply with the new rule: accept the change and begin paying overtime
wages to formerly exempt workers for hours in excess of 40 per week; raise
salaries to maintain current overtime exemptions; decrease wages to meet
budgetary needs in light of increased overtime costs; or reorganize workloads,
adjust worker schedules, and potentially hire more employees to spread out work
and keep each employee’s workweek under 40 hours.
It is imperative that employers proactively assess prior to
December 1, 2016 the current pay, job duties, scheduling, and work-hour
tracking practices to fully determine the impact the DOL’s new rule will have
on their bottom line and on their employees. Employers should review and revise
their overtime policies to provide close management of actual hours worked.
Furthermore, job descriptions versus actual job duties performed should be reviewed
as well to ensure executive, administrative, and professional work is performed
by workers who are classified as exempt. By taking such proactive steps now, employers may
minimize the impact of the new overtime rules. The new rules also mandate automatic increases
to the salary threshold every three years.
If you have any questions regarding the new rules, please
contact Laura Pfeiffer at 612.604.6685, firstname.lastname@example.org
or Mark Pihart at 612.604.6623, email@example.com