By Eileen Lucas 

For the first time in over 10 years, overtime regulations established by the Fair Labor Standards Act (FLSA) have been updated. On May 18, 2016, President Obama and the Department of Labor (DOL) announced the Final Rule, which increases the salary threshold for white-collar workers to remain exempt from overtime pay to $913 per week ($47,476 annually), more than twice the original salary threshold. This new regulation goes into effect December 1, 2016.

According to the DOL, an estimated 4.2 million salaried workers, who were exempt from overtime because they  met the previously set salary requirement, will no longer be exempt employees at their current salary level, and overtime pay will be required for work over a 40-hour workweek.  This means that if an employee’s salary falls below the newly established salary threshold, then the employer is required to either pay overtime (time and one-half the regular rate of pay) when the employee works more than 40 hours in a week, or increase the employee’s salary to meet the new salary base requirement.

Who is Exempt and Who is Non-Exempt?
Executive, administrative, and professional employees who are paid on a salary basis, paid more than the salary requirement, and perform certain duties defined under the FLSA are exempt from the minimum wage and overtime pay requirements.

The salaried employee exemption applies to white-collar employees performing professional, managerial, or administrative work, not blue-collar workers performing manual labor.  The salary  requirement for exempt employees are not applicable to outside sales employees, teachers, and practitioners of law or medicine.  Also, the FLSA does not include all professions, including many agricultural workers, railroad workers, truck drivers, and other exclusions.

How can an employer respond to the new overtime rule?
As an employer, there are several options available to enact the new salary requirements:

  1. If you have employees close to the pay level or employees where overtime is mandatory and fluctuates throughout the year: Adjust annual pay to $47,476, eliminating the need to track hours worked.
  2. If overtime is consistent throughout the year: Still pay employees the same amount they’re currently paid by making them non-exempt to the overtime rule. An employer can do this by reclassifying the employees as hourly, and adjust the hourly pay to match the employee’s current salary. For example, if you’re currently paying an employee a salary of $35,000, calculate what you would need to pay them hourly so that the total hourly amount the employee is paid for a 40-hour workweek plus the overtime payment equals the employee’s current salary of $35,000.
  3. If you want to reduce or eliminate overtime while still meeting the demands of your business: Employ additional workers or several part-time workers to assist with the current workloads. This option is especially useful during seasonal peaks.
  4. Prohibit overtime.
  5. Simply pay the overtime. Calculate the employee’s current expected annual salary based on the overtime requirements, and pay the additional time and one-half regular pay as it may be under the $47,476 threshold.

Each of these options is dependent upon the employer’s particular circumstances:

  • Either an employer doesn’t want to spend time tracking and monitoring hours, so the employer raises the salary to meet the new salary requirement,
  • Or paying overtime is more cost effective for the employer’s business, so they track and monitor hours worked to ensure employees stay below a certain threshold.

Depending on which option an employer chooses, more employers will require a way to track and monitor hours for any salaried workers below the $47,476 salary base requirement.  Employers may also need to limit the amount of work employees perform outside business hours due to the accessibility of work email on personal devices.

Brand New Addition to the Overtime Rule
Bonuses, incentive pay, and commissions can be included to up to 10% of the salary base requirement when analyzing total salary paid; the  previous rule did not include bonuses or other pay. In order to be included, the amounts are to be paid quarterly or more frequently.  For example, an employee whose salary is set at $45,000 and receives a $3,000 bonus would meet the salary level requirement if paid out at least quarterly.  A larger bonus would be capped at $4,747.60.

A Final Note
The pay for highly compensated employees increased to $134,004 from $100,000. Also, the salary requirements will be updated by the DOL every three years.

Employers Have 6 Months to Prepare
Contact your tax or payroll advisors for additional assistance with specific examples or questions on how the adjusted salary base impacts your business.