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With media coverage squarely focused on politics these days, significant regulatory changes that are about to be enacted and will impact countless American businesses, have completely flown under the radar. These changes center on determining who is eligible for overtime pay and they are definitely worth taking note. Here is what you need to know.
The overtime changes from the US Department of Labor (DOL), are being termed the “Final Rule” and what they essentially do is bring a modern interpretation to determining which white-collar salaried employees are exempt from the Fair Labor Standards Act’s overtime pay protection.
According to the Department of Labor, the percentage of full-time, salaried employees covered by overtime protection has dropped to just 7%, compared to 62% in 1975. These Final Rule changes about to be enacted will extend overtime pay eligibility to an estimated 4.2 million workers.
There are a few changes that will be ushered in with the implementation of the Final Rules, most notably is a significant rising of the salary threshold for overtime exemption.
Let’s step back for a moment and explain how a worker is exempt from overtime pay. In order to qualify for overtime exemption, a white-collar employee must meet all three of the following criteria:
- The employee must be salaried, earning a fixed salary that is not impacted by the amount of hours they work. This is referred to as the “Salary Basis Test.”
- The employee must earn more than $455 per week. This is referred to as the “Salary Level Test.”
- The employee’s primary job must be to perform executive, administrative or professional duties. This is referred to as the “Duties Test.”
Any employee that does not qualify for the exemption by meeting each of the three standards is likely to be entitled to 1.5x their weekly pay divided by 40 for every hour they work over 40 each week.
So what has changed?
The DOL is raising the salary threshold in the Salary Basis Test significantly from $455 per week to $913 ($47,476 per year). They are also enacting a requirement that this threshold is to be automatically updated every three years, going forward, to meet each new standard salary level, which are equal to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Range. The first automatic increase will be triggered on 1/1/2020.
That latter provision is important because, prior to these changes, the DOL had not updated their overtime regulations since 2004. This ensures the threshold stays current going forward.
Also in the Final Rule, the DOL is setting the annual compensation level for highly compensated employees (HCEs) equal to the 90th percentile of earnings for full time salaried workers nationally, which is $134,000 (up from $100,000).
Finally, employers will be permitted to use nondiscretionary bonuses and monetary incentives to cover up to 10% of the employee’s salary level as long as they payments are made at least quarterly.
It should be noted that the Duties Test to determine if the employee is an executive, administrative or professional has not changed in the Final Rule.
These changes stem from a March 2014 Presidential Memorandum in which President Obama instructed the DOL to bring overtime regulations up to modern standards. The new rule becomes effective December 1st, 2016.
So, as an employer, what should you do to ensure you are in compliance without shelling out a bunch of overtime? Here are a few tips:
- Identify which of your staff members are not exempt based on the criteria above and ensure you have complete control over their schedules;
- Consider bumping salaried employees that are already close to $47,476 up to clear the threshold and save the overtime;
- Re-evaluate your team structure and determine if it makes sense to add lower paid staff to support salaried workers under the threshold to lighten their workload;
- Change salaried employees to hourly to gain greater control of overtime and potentially make up for the added cost of overtime by hourly employees working less than 40 hours occasionally if their work tends to ebb and flow;
- Amend your budget to account for additional labor cost in new overtime if you think these other suggestions won’t work for your business.
These are just a few general ways in which an employer can counterbalance the new overtime pay rules. We hope you find this helpful and we highly recommend, if you have any questions about how these changes would impact you specifically, please contact our Employee Benefit Team Lead Teri Weber. Teri and her team of benefits and HR professionals are ready to help you stay compliant with the plethora of regulations facing your business.