The U.S. Department of Labor (DOL) recently published changes to the overtime rule in the Fair Labor Standards Act (FLSA). These changes will make nearly 4.2 million nonexempt employees eligible for overtime pay.
Employers will be required to comply with these changes by December 1, 2016.
What the “Final Rule” includes:
The changes included an exempt employee threshold of $47,476, which is slightly more than double the previous threshold of $23,660. This figure is based on the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, currently the South.
The new rule 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, which is $134,004.
It establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at these percentiles and to ensure that they continue to provide effective tests for exemption. Future automatic updates will begin on January 1, 2020.
Finally, the rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentives to satisfy up to 10 percent of the new standard salary level.
Why the change?
The old minimum salary for exempt workers was found to be near the poverty line for a family of four. The change was prompted by worker demand for more financial security.
What does this mean for employers?
Every three years, they will have to monitor the base salary level for exempt classification, identify impacted employees, and determine whether to reclassify employees or restructure jobs. Employers may also need to review their compensation cycles to work within the new regulations, keeping in mind the impact of continued salary increases. The new threshold is likely to have an especially strong impact on small businesses.
To implement these changes, managers will have to train nonexempt employees to track and report time. They will have to ask workers to avoid working after hours unless absolutely necessary, and they will be required to strictly manage and cap overtime hours. They will also be required to manage morale and explain to reclassified workers that the change was due to new regulations, not the value of the employee’s contributions. They may have to work with the employee to manage the transition and retain the employee’s services.
For more information, see the Department of Labor’s Fact Sheet.