The U.S. Department of Labor recently finalized a rule (the “Final Rule”) to update the federal white collar overtime exemptions. The Final Rule, which takes effect on December 1, 2016, doubles the salary threshold—from $23,660 to $47,476 per year, or from $455 to $913 a week—under which most salaried workers are guaranteed overtime. Hourly workers are generally guaranteed overtime pay regardless of their earnings level. According to the Department of Labor, the Final Rule will make an additional 4.2 million workers eligible for overtime under federal law.
Overtime protections were first put into place by the Fair Labor Standards Act of 1938, and established the general rule that workers be paid time-and-a-half for any hours worked over 40 hours in a week. In general, all hourly employees are guaranteed overtime, and salaried employees are presumed to have the same guaranteed right to overtime unless they (1) make more than a salary threshold set by the Department of Labor and (2) pass a test demonstrating that they primarily perform executive, administrative, or professional duties (the “Duties Test”). A limited number of occupations are not eligible for overtime pay (including teachers, doctors, and lawyers) or are subject to special provisions.
The new overtime level will be automatically updated every three years to adjust to wage growth in the country. Based on Department of Labor projections, the salary threshold is expected to rise to more than $51,000 when the first update occurs on January 1, 2020.
As a bit of good news for employers, the Department of Labor made no changes to the Duties Test concerning the white collar exemption, and the Final Rule permits nondiscretionary bonuses and incentive payments to count toward up to 10 percent of the new salary threshold. Workers earning more than the salary threshold are still subject to the Duties Test to determine eligibility for overtime.
Employers should review their employment and wage payment practices well in advance of the December 1, 2016 deadline to determine whether any salaried employees may lose their overtime-exempt status. If this is the case, employers have a number of available options, including (1) increasing an employee’s salary to the new $47,476 level, thereby permitting the employee to retain his or her exempt status, (2) classifying the employee as non-exempt and paying him or her time-and-a-half for all overtime hours worked, (3) prohibiting non-exempt employees from working more than 40 hours in a week or (4) reducing the employee’s salary such that salary plus overtime equals what he or she would have earned before the Final Rule.
For any questions about the New Rule or overtime compensation, please contact us at 312.216.2731 or firstname.lastname@example.org.