New Rules Will Entitle Many “White Collar” Workers to Overtime Pay

The U.S. Department of Labor (DOL) has issued new rules governing overtime pay which will automatically extend eligibility for overtime pay to an estimated 4.2 million workers. Under the new rules, which will take effect on December 1, 2016, most salaried workers earning less than $913.00 a week ($47,476.00 annually) will be entitled to collect overtime pay. This newly prescribed salary level is more than double the current amount ($455.00 per week or $23,660.00 per year) at which workers generally are considered exempt from the overtime rules.

A brief summary of the Fair Labor Standards Act (FLSA) is useful in understanding what is going on here. The FLSA mandates that employers pay their employees at least the federal minimum wage (currently $7.25 per hour) for all hours worked and overtime pay at the rate of 1.5 times their regular rate of pay for all hours worked in excess of 40 in a work week. Certain categories of employees are exempted from coverage under the Act, including doctors, lawyers and teachers. In addition, the FLSA exempts from coverage employees who are engaged in an “executive, administrative or professional capacity”. Such workers have been historically referred to as “white collar workers”. The Act itself, however, does not define the terms “executive”, “administrative” or “professional”, leaving it to the DOL to issue regulations defining the scope of these exemptions.

The current DOL rules require that an employee meet each of the following three tests in order to fall within the white collar exemption: (1) he/she is paid a predetermined and fixed salary that is not subject to reduction for the quality or quantity of work performed (the “salary basis test”); (2) the amount of the employee’s salary meets a minimum specified amount (the “salary level test”); and, (3) the employee’s duties involved executive, administrative or professional duties, as defined in the DOL’s regulations (the “duties test”). The recently issued rules impact the second of those tests, the “salary level test”.

So, beginning December 1, when the new rules take effect, most of the white collar workers earning less than the “standard salary level” of $913.00 per week will be entitled to overtime for hours worked in excess of 40 in a given work week. That will be the case regardless of whether these employees meet the other two tests for the white collar exemption. This standard salary level was determined in accordance with the 40th percentile of earnings of full time salaried workers in the lowest wage region in the country, currently the South. The standard salary level will hereafter be subject to adjustment every three years, again, by reference to the 40th percentile of full time salaried workers in whatever is then the lowest wage region in the country.

Employers will be allowed to use nondiscretionary bonuses and incentive payments (such as commissions) to satisfy up to ten percent of the standard salary level, provided these payments are made on a quarterly or more frequent basis.

Lastly, the new regulations also impact those who are considered to be “highly compensated employees” (HCE) under the Act. Currently, employees whose annual earnings are $100,000.00 or more are generally exempt from the overtime rules, even if they don’t meet the “duties test.” When the new rules go into effect, the applicable dollar amount to qualify as an HCE will increase to $134,004.00.

The DOL estimates that approximately 4.2 million workers who are currently considered exempt under the FLSA will become entitled to overtime in the first year of implementation of these new rules. That number is expected to swell to more than 5 million workers within ten years of implementation. An additional 65,000 HCEs are estimated as being eligible for overtime in the first year following the rules change, with 200,000 being affected within ten years.

Clearly, many employers will be impacted by these changes and employers are well advised to become knowledgeable to how these new rules will affect their payroll practices.

© 7/19/2016 Hunt & Associates, P.C. All rights reserved.