Overtime Rules Modernized
In May, 2016, the U.S. Department of Labor updated and modernized the regulations governing the exemption of executive, administrative, and professional employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act
The effective date of the new rule is December 1, 2016. The initial increases to the standard salary level from an annual salary of $23,660.00 to $47,476.00 – ($455 to $913 per week). The standard salary level for highly compensated employees (HCE) total annual compensation requirement is raised from $100,000 to $134,004 per year.
The Department of Labor estimates that an additional 4.2 million white collar workers will become newly entitled to overtime protection because of the increase in the salary level.
According to the Department of Labor, the Fair Labor Standards Act (FLSA) ensures minimum wage and overtime pay protections for most employees covered by the Act. Some workers, including bona fide executive, administrative, and professional (EAP) employees, are exempt from those protections.
According to information published by the Department of Labor, since 1940, the Department’s regulations have generally required each of three tests to be met for the FLSA’s EAP exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).
Key Provisions of the Final Rule Published by the Department of Labor
The Final Rule focuses primarily on updating the salary and compensation levels needed for EAP workers to be exempt. Specifically, the Final Rule:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for a full-year worker;
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004; and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. The Final Rule makes no changes to the duties tests.
To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test.
There is also a process for updating the salary requirements every three years, beginning on January 1, 2020.
For the first time, employers will be able to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level.
The new rule continues the requirement that HCEs must receive at least the full standard salary amount each pay period on a salary or fee basis without regard to the payment of non-discretionary bonuses and incentive payments, and continues to permit non-discretionary bonuses and incentive payments (including commissions) to count toward the total annual compensation requirement.
The new rule does not change any of the existing job duty requirements to qualify for exemption. As a result of the change to the salary level, the number of workers for whom employers must apply the duties test to determine exempt status is reduced, thus simplifying the exemption. Both the standard duties test and the HCE duties test remain unchanged.