Since March of 2014, HR Legalist has been tracking a big change to the federal overtime rules. When the preliminary rule was announced last July, the Department of Labor (“DOL”) made it clear that the exemption rules would be significantly narrowed — meaning that millions more employees would be entitled to time-and-a-half overtime pay for all hours worked over 40 per week. After over 280,000 comments from interested parties (including many concerned employers), the White House unveiled the new rule last night with a video and blog post.
The final rule has not yet been formally published, but a PDF copy was uploaded to the Federal Register website this morning. Be warned – the rule itself is over 500 pages long and includes lengthy discussions of overtime rule history and the rationale behind each portion of the new rule. Fortunately, I’ve summarized what employers need to know in this Q&A:
- How exactly are the exemptions changing?
The salary threshold – under which employees are guaranteed overtime if they work over 40 hours per week – is increasing to $913 per week ($47,476 per year). That’s double the old threshold of $455 per week ($23,660 per year). The DOL estimates that over 4 million employees will be affected by the changes this year.
- When will the new rule take effect?
December 1, 2016.
- Will the “duties test” for the white collar exemptions change?
No. There are still three tests that employers have to meet before designating an employee exempt from overtime pay: (1) the employee must be paid a regular salary; (2) the employee must meet one of the duties tests (such as the executive, administrative or professional “white collar” exemptions); and (3) the employee must meet the salary threshold. Only the third part of the test is changing.
- Will the new salary threshold be automatically adjusted in the future?
Yes – but not annually as originally proposed. The salary threshold will be increased every three years, starting on January 1, 2020. Each update will be tied to the 40th percentile of full-time salaried workers in the lowest-wage US Census region (currently, the South region). The DOL estimates that the January 2020 adjustment will bring the new threshold to around $51,000 per year. The DOL will provide at least 150 days’ notice before each update.
- Can employers count bonuses, commissions and other incentive payments towards the new threshold?
Yes – with some caveats. In order to count towards the new threshold, bonuses, commissions and other incentive payments must be non-discretionary (meaning that they are payable if the employee satisfies certain performance criteria, as opposed to entirely at the employer’s discretion) and payable on at least a quarterly basis. Only 10% of the threshold can be met using bonuses, incentive pay or commissions. In order to meet the threshold, employers can make a “catch up” payment within one pay period at the end of each quarter. The regulations do not allow employers to supplement bonuses at the end of the year to meet the threshold.
- Is the salary level changing for Highly Compensated Employees?
Yes. Under the existing rules, employees who make over $100,000 per year are considered highly compensated employees, and are exempt from overtime if they satisfy a relaxed version of the duties test. The new rule increases the salary threshold for highly compensated employees to about $134,000 per year. This threshold will also be adjusted every three years to equal the annual weekly earnings of the 90th percentile of full-time salaried workers nationwide.
- Which employers are subject to the new rules?
Unlike some other laws that don’t apply to organizations with under 50 employees, the overtime rules apply to all organizations with at least two employees that (1) have an annual dollar volume of sales or business of at least $500,000; or (2) are hospitals, business providing medical or nursing care, schools, preschools and colleges, and government agencies. Individual employees can also be covered if they are engaged in interstate commerce (i.e. assembling goods for sale or handling interstate transactions). Nonprofits are also covered if they meet these tests.
- What should employers do to prepare for these changes?
Employers should begin to plan for these changes right away. First, determine whether you have any exempt employees who will no longer be exempt under the new rules (such as first-level managers, supervisors and office workers making under $47,000). Depending upon your employees, needs and budget, the best option may be one or a combination of the following: (1) increase salaries to keep certain employees exempt; (2) convert employees to hourly and pay overtime; (3) keep employees on salary but pay overtime; and (4) shift duties and responsibilities to reduce or eliminate overtime for newly-eligible workers.
This new rule provides an opportunity for employers to double check to make sure all of their employees are classified properly to avoid litigation and penalties. Employers that face a large financial impact due to these changes, or that have concerns about how to classify certain employees, should consider working with counsel to get ready for the new rule, and identify and fix any past misclassifications.
Ivo Becica focuses his practice on advising employers on how to reduce litigation risk and resolve employee issues, and on defending employers in litigation if necessary. He can be reached at 215-667-6335 or firstname.lastname@example.org