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The Department of Labor Finalizes the New Overtime Rules
May 18, 2016
Salary basis adjusted down from the proposed rule, but still much higher than current rule.

New requirement goes into effect December 1, 2016.

The Department of Labor (“DOL”) has slightly modified its proposed rule updating the salary basis, or minimum necessary salary, employers are required to pay in order to treat employees as exempt from overtime. Under the final rule, which will go into effect December 1, 2016, an employee must be paid a minimum salary of $913 per week (or $47,476 per year) in order to qualify as exempt from overtime under most of the traditional white collar exemptions. The DOL expects the new rule to extend the right to overtime protections to 4.2 million more employees.

The federal right to overtime dates back to the passage of the Fair Labor Standards Act in 1938. The basic rule is that workers must be paid time-and-a-half for any hours worked over 40 hours in a week. In general, all hourly employees must be paid overtime. The same rules apply to salaried employees unless they:
  1. earn more than the “salary basis” and
  2. primarily perform defined executive, administrative or professional duties. 
There are other exceptions for certain occupations (including teachers, doctors and lawyers) and other limited, special provisions.

The DOL last updated these regulations in 2004, when—among other changes—it set the weekly salary level at $455 ($23,660 annually). The Final Rule sets the new salary basis at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, currently the South. In real numbers, it essentially doubles the salary threshold—from $23,660 to $47,476 per year. In addition, the Final Rule will:
  • Raise the highly compensated employee ("HCE") threshold—from $100,000 to $134,004—after which only a minimal showing is needed to establish the employee is exempt from overtime. This figure is the equivalent of the 90th percentile of full-time salaried workers nationally.
  • Cause the salary threshold to update every three years. The updates will ensure the threshold is maintained at the 40th percentile of full-time salaried workers in the lowest income region of the country (and maintain the HCE compensation figure at the 90th percentile). Based on projections of wage growth, the DOL expects the salary basis to rise to more than $51,000 with the first update on January 1, 2020.
  • Allow employers, for the first time, to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. These payments may include nondiscretionary incentive bonuses tied to productivity and profitability, but only can be counted if paid at least quarterly.
Finally, the Final Rule makes no changes to the duties tests; the duties an employee must perform in order to be exempt from overtime as an executive, professional or administrative employee are unchanged.
The upshot is that, after months of waiting, employers now have a date certain when a large segment of their workforce will no longer qualify for the salary exemption. In order to prepare, employers will have to identify the employees who will not qualify for the exemption and decide if they want to increase the employee’s salary to the new minimum, or determine an appropriate hourly wage. Employers are free to adjust the wage so that the annual compensation, based on past projections of overtime hours worked, remains relatively constant.

If you have any questions about the new rule, or about any other labor and employment issue, please contact us.

Labor & Employment Law Eric E. Kinder