New Department of Labor Overtime Rules Will Take Effect on December 1, 2016

By Matt Lynch
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Sebris Busto James

Original Publish Date: July 12 5, 2016

Effective December 1, 2016, employers must comply with the U.S. Department of Labor’s (“DOL”) updated regulations regarding the executive, administrative, and professional exemptions to the overtime requirements in the Fair Labor Standards Act. (“FLSA”).

The FLSA requires that most employees receive overtime pay at 1.5 times the regular rate of pay for all time worked in excess of 40 hours in a workweek. The law exempts employees who are employed in an executive, administrative or professional capacity (i.e., “white-collar” exemptions). To qualify, an individual must:

Be paid on a salaried basis, i.e., he or she must receive a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed;
Be paid at a specified weekly salary level (or more), currently set at $455 per week (exclusive of board, lodging or other facilities); and
Primarily perform executive, administrative, or professional duties, as defined in the DOL’s regulations.

The DOL’s current regulations also contain a special rule for “highly-compensated” employees. An individual will be exempt from the FLSA’s minimum wage and overtime requirements under this rule if he or she earns total annual compensation of $100,000 or more (exclusive of board, lodging or other facilities), which includes at least $455 per week paid on a salary basis, his or her primary duty includes performing office or non-manual work, and he or she customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee. Washington currently does not have a “highly compensated” employee exemption, meaning that the federal rule changes in this regard do not impact Washington employers.

The new regulations modify the current regulations in the following areas:

Salary threshold. The final rule will raise the standard salary threshold to equal the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region, currently the South. This will raise it from $455 a week to $913 a week ($47,476 for a full-year worker) effective December 1, 2016. According to the DOL, this means that 35 percent of full-time salaried workers will be automatically entitled to overtime, based solely on their salary.

Highly Compensated Employees (HCE) salary level. The rule also updates the total annual compensation level above which most white collar workers will be ineligible for overtime. The final rule raises this level to the 90th percentile of full-time salaried workers nationally, or from the current $100,000 to $134,004 a year. As noted, this change does not affect Washington employees because Washington does not recognize the HCE exemption.

Automatic updates. Every year that the threshold remains unchanged, it covers fewer and fewer workers as wages overall increase over time. The Department’s final rule will fix this by automatically updating the salary threshold every three years, beginning January 1, 2020. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest-wage Census region, estimated to be $51,168 in 2020. The HCE threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020. The DOL will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019.

Bonuses, incentive payments, and commissions. The final rule will allow up to 10 percent of the salary threshold for non-HCE employees to be met by non-discretionary bonuses, incentive pay, or commissions, provided these payments are made on at least a quarterly basis. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to maintain exempt status, the employer may make a “catch-up” payment to the employee at the end of the quarter to make up for the shortfall (i.e., a payment up to 10% of the required salary level for the preceding 13-week period). The catch-up payment must be made within one pay period of the end of the quarter, and will count only toward the prior quarter's salary amount (and not toward the salary amount in the quarter in which it was paid). If the employer chooses not to make the catch-up payment for a particular quarter, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.

Duties test. The final rule does not make any changes to the “duties test” that determines whether white collar salaried workers earning more than the salary threshold are ineligible for overtime pay. It is expected, however, that fewer workers will be considered exempt over time because the higher salary threshold means more workers’ entitlement to overtime pay will be clear just from their salaries.

Next Steps

Employers should review the salaries currently paid to employees who are classified as exempt under the executive, administrative and professional exemptions, and the highly-compensated employee exemption. Employers must determine whether these salaries, with or without the non-discretionary bonus and incentive payments outlined above, will satisfy the increased salary requirements under the new DOL regulations. Should an exempt employee’s compensation not satisfy the new requirements, an employer may convert the exempt employee to a non-exempt employee and pay the employee overtime for all time worked in excess of 40 hours per week (or limit the employee’s hours to 40 hours per week to avoid paying overtime, or increase the employee’s salary (or non-discretionary bonus or incentive payment opportunities, if applicable), to satisfy the new salary requirements. Either way, employers have 5 months to plan for and implement the changes imposed by the DOL.

Matt Lynch is a shareholder with Sebris Busto James. Matt represents private and public sector health care and other employers in all aspects of labor relations, including in collective bargaining, grievances and labor arbitrations. He has handled many cases in front of the NLRB and PERC, and also advises employers on day-to-day and strategic employee relations issues, including discipline and discharge, employee leaves, employment agreements, policy development, handbooks, wage and hour and discrimination. Contact Matt at mlynch@sebrisbusto.com or 425-450-3387.