Know how to handle these changes & properly prepare a strategy
by Robert Coker
July 18, 2016

On May 18, 2016, the Department of Labor (DOL) issued a final rule that raises the minimum salary an employee has to make in order to qualify to be exempt from overtime pay from $23,660 to $47,476.

For your company, this means that any salaried employee currently on your payroll making less than the minimum threshold must now be paid overtime pay for all hours worked in excess of 40 hours per week.

The rule also raises the compensation level for highly compensated employees subject to a more minimal duties test from its previous amount of $100,000 to $134,004. This ruling goes into effect on December 1, 2016.

To better understand the impact of the new overtime rule, it helps to first understand who may currently be exempt from overtime pay. A three-part test was established by the DOL to determine if a worker is exempt from overtime pay. The employee must satisfy all of the following in order to be excluded from overtime pay:

  1. The employee has a fixed salary that does not vary based on the hours or quality of his work.
  2. The employee is paid at least $455 per week or $23,660 annually.
  3. The employee’s job responsibilities primarily consist of executive, administrative or professional duties.

Why the change, one might ask? The DOL stated that, “A basic tenet of our economy is that a hard day’s work should lead to a fair day’s pay.” The DOL feared that this tenet was in jeopardy, and further went on to say, “Their actions will ensure that promise (tenet) is a reality for more of America’s workers, too many of whom have been left working long hours for no additional pay, taking them away from their families and civic life without any extra compensation.”

Put simply, the DOL’s stated goals are to put more money in the pockets of more middle-class workers and to allow for more free time, if companies are not willing to pay extra overtime costs. Those in the industry who have shown opposition to the new rule have said that it would do the following:

  • Not result in a higher wage for workers as intended
  • Force contractors to cut workers’ hours
  • Force employers to not only reduce worker hours, but possibly even reduce their workforce
  • Reduce employee benefits
  • Force employers to spend more of their proceeds on compliance instead of compensation
  • Force employers to take employees off salaried status
  • Deprive employees of autonomy in their work schedules (i.e. no longer be able to take a morning off to take a child to the doctor without affecting pay)
  • Rob employers of needed flexibility and employees of career advancement avenues, and, in the future, it will have a disruptive effect on the construction industry as a whole, regardless of what benefits it may have to the workforce.

In response to the opposition, the DOL has stated that employers have plenty of options with the new overtime rule, including:

  • Switch employees from salary to an hourly pay scale and pay time-and-a-half for overtime work. Overtime compensation can be factored into the overall hourly pay scale so that there are consistent wages.
  • Raise employees’ salaries for those employees whose salaries are close to the new threshold to avoid the overtime issue. The employer may build the increase into their bonuses and commissions, if applicable.
  • Raise workers’ salaries above the new threshold if the amounts of projected overtime will result in exceeding the minimum threshold anyway.
  • Limit or redistribute workloads among existing workers so that all workers’ hours do not exceed 40 hours per week.
  • The employer may consider hiring additional employees to avoid or eliminate overtime hours.
  • Some combination of the above.

Unless the rule is somehow modified or repealed as a result of the upcoming elections, employers are faced with difficult decisions that could potentially negatively impact their bottom lines and have been given little time to plan for the ensuing changes.

To properly prepare your company for the changes associated with the rule, work with a trusted advisor or accountant to navigate the specifics and mitigate the potential impact to your organization’s bottom line.

For more information, watch a general informational webinar from the DOL on the overtime final rule at https://www.dol.gov/whd/overtime/final2016/webinars.htm

3 Key Provisions of the Overtime Final Rule

The final rule focuses primarily on updating the salary and compensation levels. 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)
  3. Establishes a mechanism for automatically updating the salary and compensation levels every 3 years to maintain the levels at the above percentiles and to ensure that they continue to provide useful, effective tests for exemption.

Additionally, the final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every 3 years, beginning on January 1, 2020.