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New Overtime Rules Issued:What it Means for You

June 9, 2016

A change in the rules governing overtime has been coming for two years, with a sneak preview of proposed modifications last year. But on May 18, the Department of Labor (DOL) came out with its new final rules, which take effect on December 1, 2016. The rules will significantly raise the salary level used to determine whether employees are eligible for overtime and will affect more than 4 million salaried employees, according to the DOL.

The Obama administration’s goal was to reset the income threshold to the point it would have reached, with period inflation adjustments, had it not been frozen more than a decade ago.

Under the new rule, the wage threshold test is more than doubling from today’s $23,660 ($455 per week) to $47,476 ($913 per week). The limit will be adjusted every three years beginning January 1, 2020. Employees earning less than $47,476, regardless of their job responsibilities, are deemed non-exempt, and therefore entitled to overtime pay. In addition, the limit will be adjusted every three years beginning January 1, 2020.

Exempt or Non-exempt?

Unless specifically exempted, employees covered by the Fair Labor Standards Act must receive pay for hours worked in excess of 40 in a workweek at a rate of not less than one and one-half of their regular rates of pay. Two tests determine whether employees should be treated as “exempt,” and thus not entitled to overtime pay:

1. A pay threshold test, and

2. A duties test, under which employees who “primarily perform executive, administrative, or professional duties,” are deemed exempt. Regulations spell out those criteria in greater detail. The criteria for the duties did not change.

Highly Compensated Threshold

There is also a “highly compensated” classification. The pay threshold for “highly compensated” also went up – from $100,000 to $134,004. Employees earning above that higher amount, regardless of whether their jobs would be classified as non-exempt under the “duties” test, can still be treated as exempt, and thus not entitled to overtime pay.

Note: Employees’ pay for purposes of determining their exempt/non-exempt status includes non-discretionary bonuses, incentive pay, and commissions, as long as those payments occur at least on a quarterly basis and don’t exceed 10% of the employee’s compensation.

If an employee loses his exempt status due to the increased salary threshold, an employer can still choose to pay him/her on a salary basis. However, salaried employees who are do not qualify for exempt status are entitled to overtime pay, so it is important to track time worked to ensure that the hours:

a) do not exceed 40 hours in a workweek, or

b) that employees are awarded the overtime pay they have earned.

Overtime pay will need to be determined based on calculating what the employee’s salary translates to on an hourly basis for a 40-hour workweek.

Impact Assessment

Here are some immediate steps to consider in response to the new rules. Start by answering these questions:

•How many of your employees are currently classified as exempt whose salary falls under the new threshold?

•How many of them routinely work more than 40 hours a week?

•What would it cost if they continue to work more than 40 hours per workweek and are eligible for overtime?

•Would it be more cost-effective to give raises to exempt employees who are currently earning somewhat less than $47,476, to maintain the exempt classification and avoid having to track their hours and pay them overtime?

•What systems do you need to put in place to monitor employees’ hours carefully after the new rules go into effect? The DOL says employers “may use any method they choose for tracking and recording hours” as long as it is complete and accurate.

“Can We Talk?”

It’s also a safe bet that your employees will have heard about the impending rule change, and they’ll be looking to you for answers about how it will affect them. For most employers, it’s probably wise to begin engaging employees on the topic, even if you haven’t mapped out the details of how you will respond. An honest “we’re figuring this out” answer can be better than silence.

For more information on the final rules, consult with your payroll or tax advisor.