New Rules for Overtime Pay

On May 18, the U.S. Labor Department unveiled new rules that expand requirements for employers to provide overtime pay. Related to the Fair Labor Standards Act (FLSA), the new rules address eligibility for overtime pay and exemptions from overtime requirements for employees in executive, administrative, professional, outside sales and computer positions under the FLSA.

Currently, employees who earn more than $23,660 per year (or $440/week) are exempt from overtime if they perform managerial or professional duties. When the new rules go into effect on December 1, 2016, that salary threshold will increase to $47,476 per year (or $913/week). Going forward, salary threshold levels will be automatically updated every three years, starting on January 1, 2020.

The federal government has predicted the new salary threshold could generate as much as $1.2 billion in additional overtime compensation during the first year that it is in effect. With respect to these new regulations, the Department of Labor is emphasizing its objectives to “put more money in the pockets of middle class workers” and “ensuring protections” to millions of workers.

According to the Department of Labor, “The Final Rule focuses primarily on updating the salary and compensation levels needed for executive, administrative and professional workers to be exempt. Specifically, the Final Rule:

  1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
  2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
  3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.”

These new rules have the potential to adversely impact employers, requiring them to increase cash compensation and putting pressure on overall compensation, benefits, and reward programs. In addition, employers may feel the need to more carefully manage weekly hours worked by their employees who are newly eligible to earn overtime, leading to production or customer service challenges, coupled with the potential need to hire more employees.

Employers should initially consider which of their employees will be affected by the new overtime rules. Those who have not required exempt employees to track and record their hours worked should start doing so in order to understand the potential amount of overtime that may be required once the new regulations take effect. It will be important to be prepared to comply with the new rules on their effective date to minimize risks of non-compliance, potential litigation, and penalties.

staff-terry-bushWritten by: Terry Bush, SPHR - Director, HR Services
Phone: 574.289.4011, x205



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