Changes to Overtime Regulation

Client Advisory
May 25, 2016

On May 18, 2016, the U.S. Department of Labor released a Final Rule updating the overtime regulations that revises the salary test for the "white collar" exemptions to the Fair Labor Standards Act ("FLSA"). The Final Rule will go into effect on December 1, 2016. 

Salary Threshold. The Final Rule raises the salary threshold for the executive, professional and administrative exemptions from $455 per week to $913 a week ($47,476 for a full year worker). 

The salary threshold for the automatic exemption as a highly compensated employee ("HCE") also will increase from $100,000 per year to $134,004 per year.

The salary threshold will be updated every three years and will reflect the salary of the 40th percentile of full time salaried workers in the lowest wage Census region.

Inclusion of Bonuses and Commission to Salary. The Final Rule allows up to 10 percent of the $47,476 salary threshold for a non-HCE to be met through non-discretionary bonuses, incentive pay or commissions provided that the payments are made at least quarterly. Employers will be permitted to make a "catch-up" payment at the end of a quarter to make up any shortfall. If, by the last pay period of the quarter, the sum of the employee’s actual weekly salary, plus received non-discretionary bonus, incentive, and commission payments, does not equal $11,869, an employer may make one final payment to reach the $11,869 level no later than the next pay period after the end of the quarter.

Duties Test. There is no change to the white collar exemptions "duties test." Employees who meet the salary threshold must also meet the current duties test in order to be exempt from the overtime regulations.

What This Means for Employers. All employees who earn less than $47,476 per year, must be classified as non-exempt and paid overtime (time and a half) for all hours worked over 40 in a week, as of December 1, 2016.

In order to avoid additional overtime obligations employers can increase the salary of employees who meet the duties test or limit employees’ work hours to forty hours a week. 

What Employers Should Do Next. Employers should conduct classification audits of all positions to evaluate whether positions meet the FLSA salary threshold and duties test. 

Employers should update company handbooks and redistribute policies to ensure that employees who are eligible for overtime are aware of their obligation to comply overtime approval, time keeping records and working off-the-clock policies. 

Employers must make sure that they keep accurate wage and hour records and require all non-exempt employees to accurately record all time worked.  

Employers should be aware that they are required to pay wages to employees for all hours worked, including overtime, even if the employer did not know or approve the additional work time. Failure to pay all hours worked could expose the employer to significant liability under the FLSA and state wage laws. For this reason employers should consistently and uniformly enforce overtime approval and time keeping policies and impose disciplinary action including termination for employees who fail to follow the employer’s policies.

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