May 18, 2016

U.S. Department of Labor announces new rule to expand overtime eligibility for administrative, executive and professional employees

Under direction given in 2014 by President Obama, the U.S. Department of Labor issued a new Rule updating the salary threshold required to exempt administrative, executive and professional employees (“white collar” employees) from overtime pay. To explain its new Rule, the Department created a number of helpful guides and posted them at its webpage, including a Wage and Hour Division: Overtime Fact Sheet, Questions and Answers and Private Employers Technical Guidance Document Guidance.

After publishing its Notice of Proposed Rulemaking in July 2015, the Department of Labor received more than 270,000 comments. On May 18, 2016, the Department of Labor announced its Final Rule, which will be fully published in the Federal Register. The Final Rule is not the same as the proposed Rule, having a slightly lower salary threshold for white collar employees and a higher annual salary level for highly compensated employees. Still, the last update to the salary threshold was in 2004, when the Department of Labor set the weekly salary level at $455 ($23,660 annually).

The Final Rule makes three major changes:

1) It sets a new standard salary level of $913 per week or $47,476 annually for a full-time worker. Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level, provided employers pay those amounts on a quarterly or more frequent basis.

2) It raises the total annual compensation requirement for highly compensated employees to $134,004.

3) It establishes a mechanism for automatically updating the salary and compensation levels every three years.

The effective date of the Final Rule is December 1, 2016. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

The takeaway for employers is: bona-fide salaried white collar employees earning an annual salary less than $47,475 will become eligible for overtime pay – time-and-a-half for each hour worked over 40 in a week – starting on December 1, 2016. Employers may include up to $4,747.60 (10 percent of the new salary level) of commissions or nondiscretionary bonuses when calculating the white collar employee’s salary as long as that additional pay is given quarterly or more frequently. If overtime pay poses a financial constraint to employers, they may need to adjust the work of their white collar employees to ensure it can be accomplished within a 40-hour workweek or possibly reduce the amount of pay that currently is allocated to these employees’ base pay and then add pay to account for overtime for hours worked over 40 in a workweek.

Should you have questions about the Final Rule, we encourage you to contact one of the Employment attorneys at Chuhak & Tecson, P.C.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Jeralyn H. Baran, Principal