On May 18, 2016, the Department of Labor (DOL) released a Final Rule regarding changes to the overtime regulations of the Fair Labor Standards Act (FLSA). The FLSA is a federal law that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. Some employees, however, are exempt from the FLSA’s overtime requirements. If an employer improperly classifies an employee as exempt, it can face substantial liability. Unfortunately, determining whether an employee is exempt has always been fairly complex. It requires an analysis of the salary paid to the employee and the duties actually performed by the employee – not just the job title. To complicate matters further, the DOL’s recently-revised FLSA exemption criteria, effective December 1, 2016, will likely reclassify approximately 4.2 million currently exempt employees.
Most significantly, the Final Rule includes a considerable increase in the minimum salary requirement for an employee to be classified as exempt. In its current form, an employee must earn at least $455.00 per week, or $23,660.00 per year, to meet the salary requirement of an exempt classification. The Final Rule increases the salary requirement so that an employee must earn at least $913.00 per week, or $47,476.00 per year. To illustrate the effect of the increased salary level test, consider the following example:
Widgets, Inc. employs Wally as a Warehouse Manager. He is paid $850.00 per week, or $44,200.00 per year. He usually works 48 hours per week. He is properly classified as an exempt employee and does not receive any overtime wage.
As of December 1, 2016, Wally’s current salary will not meet the salary requirement for him to be an exempt employee. His salary will be considered payment for only 40 hours of work, making his hourly rate $21.22 per hour. Widgets, Inc. will be required to pay Wally overtime for the additional eight hours of work per week. Overtime is calculated at 1.5 times an employee’s hourly rate. Widgets Inc. would owe Wally $31.88 per hour in overtime, which equates to an additional $13,262.00 per year.
The Final Rule also increases the minimum annual salary requirement for highly compensated exempt employees from $100,000 to $134,004.00. Future increases in the salary level tests for exempt employees are also set to occur automatically every three years, beginning on January 1, 2020.
Employers are not without options, however. For example, employers could reduce employees’ hourly wages, increase employees’ salaries to meet the new requirements, reorganize job responsibilities to reduce overtime, or simply accept the resulting costs. Additionally, for the first time, employers may count non-discretionary bonuses, incentives, and commissions toward up to 10% of the required salary level. Careful consideration should be given to what option is best for each situation.
For more information, join KWW attorneys Jaime Kolligian and Katie Basch on June 2, 2016 for live in-depth coverage of the DOL’s new overtime rules. During this special edition Rise & Learn Workshop, employers will learn everything they need to know about the regulatory changes, as well as useful guidance on how to comply with the new rules in advance of the December 1, 2016 deadline. Additional details can be found here.