New Department of Labor Overtime Regulations

Date: May 18, 2016

Effective December 1, 2016, the US Department of Labor regulations defining overtime-exemption eligibility requirements will change, with the impact upon employers being that fewer employees may be eligible for payment on a level salary basis for all hours worked – that is, employers may lose their overtime exemption.  The new requirements will have a direct impact upon any current salaried employee being paid a salary of less than $913 per week.

As background, the Federal Fair Labor Standards Act, the Federal law controlling wages, hours and overtime, requires that all employees who work more than forty hours in a single work week be paid time-and-one-half for all hours worked over forty hours.  The requirement is universally applicable to every employee, unless the employee qualifies for one of the many overtime exemptions which allows the employer to pay the employee on a level salary basis each week, regardless of the number of hours worked in the week. 

The new regulations issued on May 18, 2016, address eligibility requirements to qualify for three of the most commonly used exemptions, often called the “white collar exemptions”: (1) the Executive Exemption, (2) the Administrative Exemption, and (3) the Professional Exemption.  These are the exemptions most frequently used by employers to pay managers, supervisors and department heads on a level salary basis. The first two of these three exemptions, very broadly speaking, require that the individual exercise judgment and discretion as their primary function relating to either the management and supervision of other employees (the “Executive Exemption”) or with the direction of a particular function within the employer's business or of the management of a function in another business (the “Administrative Exemption”).  As applied to the employment setting, the Executive Exemptions might apply to the marketing department supervisor or the programs manager, by reason of their employee supervisory responsibilities.  The Administrative Exemption might apply to jobs where other employees are not supervised, but the function is vital to the business direction, such as the company controller.

The change announced on May 18, 2016, increases the salary level that must be guaranteed, in each week (not subject to fluctuation each week based upon hours worked), to qualify for a white collar exemption, currently set at $455/week ($23,660/year).  Effective December 1, 2016, the white collar exemptions will only be available to employees if there is a guaranteed salary of $913/week ($47,476/year).

Thus, the impact of the change falls upon any employee who currently makes between $455/week and $913/week, and is currently being claimed to be overtime-exempt, as that person will become disqualified for the exemption on December 1, 2016, unless the salary is increased to meet the new exemption qualification threshold.  Alternatively, if the salary is not raised, the individual's pay methodology may be changed to hourly, with overtime paid for weekly hours over forty.1

The new regulation includes two other additional provisions.  First, in satisfying the new $913/week threshold, non-discretionary bonuses and incentive payments such as commissions, can be used to satisfy up to 10% (i.e., $91.30) of the $913/week salary requirement.  As this is a brand new concept to the definition of “salary,” it is too early to say exactly how this will be administered, except that one implication seems clear – the 10% allowance cannot be from a wholly discretionary program – it must be a matter of compensation right based upon some established criteria.    It is questionable if this provision will see much use, as the economic result of use is non-existent. 

Finally the regulation raises the annual salary threshold from $100,000/year to $134,004/year for individuals qualifying for the white collar exemptions under the so-called “highly compensated test” (“HCA”) – the test that allows an exemption almost automatically as the mere payment at the HCA test level is presumed to be proof of qualifying job functions.

1. Note, if the individual never works more than 40 hours in a week, the applicability of an overtime exemption becomes moot, and the employee may be paid a flat salary at any level, so long as the salary exceeds the applicable minimum wage for the hours worked.