On Wednesday, May 18, 2016, the U.S. Department of Labor released its final proposed changes to the Fair Labor Standards Act (FLSA), raising what’s known as the overtime salary threshold for those employees designated as exempt employees under the “executive, administrative, and professional” exemption. The rule, set to take effect on December 1, 2016, makes an additional 4.2 million workers eligible for overtime pay. Under the new regulation, salaried workers earning up to $47,476 a year ($913 a week) must receive time-and-a-half overtime pay when they work more than 40 hours a week. The previous cutoff for overtime pay relating to salaried workers, set in 2004, was $23,660 annually.
This new regulation has been praised and criticized. While many workers will receive more pay when they work overtime, others may end up working fewer hours if employers limit their time at work. Another scenario is that employers decide to increase salaries of some workers thereby pushing them over the cutoff and eliminating the requirement of overtime pay.
In addition to making millions of new employees eligible for overtime, the new regulation also includes:
- An automatic adjustment in the salary threshold every three years to adjust for wage growth (maintaining the level at the 40th percentile of full-time salaried workers in the lowest-wage region);
- An increase in the annual compensation requirement for the exempted Highly Compensated Employee (HCE) from $100,000 to $134,004 (90th percentile of full time salary workers nationwide); and
- Permitting the use of nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level for non-highly compensated employees, if the nondiscretionary bonuses and incentive payments are paid quarterly or on a more frequent basis.
Contrary to early White House discussions, the new regulations do not modify the complicated and often misinterpreted “duties test.” If employees earn above the salary threshold, employers may not be required to pay overtime, depending on the employee’s job duties. Are employees truly bona fide executives, administrators or professionals? This duties test continues to need close evaluation by businesses so that employees earning more than $47,476 are properly classified as exempt or non-exempt and wages paid correctly. Employers must continue to examine the job duties of each salaried employee and appropriately determine the employee classification. Increased pressure is expected to be placed on businesses to correctly classify workers. It is estimated that with the new overtime regulations, widespread minimum wage hikes and more regulatory attention, lawsuits will increase by at least eight percent this year. It is a perfect storm for litigation.
The Take Away
Failure to comply with the new regulations effective December 1, 2016, will expose your business to significant wage and hour actions whereby you may be required to pay back-due wages, double damages, and attorneys’ fees. Colleen Kaufenberg and Evan Cordes, attorneys at Hansen Dordell, have significant experience working with employers to review employee classifications and wage and hour laws. We are ready to assist your business in remaining compliant with the FLSA and all other employment related laws.
In 2016, Hansen Dordell is celebrating 70 years of excellence. Founded in 1946, the firm’s reputation for innovation, civility, and integrity endures to the present day. We thank our attorneys and our clients for their dedication and trust, and look forward to many more years of service.