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On May 18, 2016, the Department of Labor released final regulations which automatically extend overtime pay protections to over 4 million workers within the first year of implementation. Other estimates put the number of newly eligible workers substantially higher.

The final regulations update the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt, specifically, the final regulations:

  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.) (This is increased from $455 per week; $23,660 annually);
  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).  (This is increased from $100,000);
  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.

Additionally, the final regulations 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.

There will be no change in the duties test used to determine whether employees earning more than the salary threshold must be classified as nonexempt form overtime, including the exemptions for executive, administrative and professional position, among others.

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 three years, beginning on January 1, 2020.

What impact will the changes have on employers?

The above substantial increase in the salary threshold for exempt employees will result in many employees who had been considered exempt (and not entitled to overtime pay) being re-designated as non-exempt.  This will result in the need to pay overtime for any hours worked in excess of 40 hours per week.  It will also result in increased recordkeeping obligations for employers, who must now track and record the hours of the formerly exempt, but now non-exempt, employees.

What should employers do?

Employers have a wide range of options for responding to the changes to the salary level. Employers can choose the one that works best for them. Options include:

  1. Raise salary and keep the employee exempt from overtime: Employers may choose to raise the salaries of employees to at or above the salary level to maintain their exempt status, if those employees meet the duties test (that is, the duties are truly those of an executive, administrative or professional employee). This option works for employees who have salaries close to the new salary level and regularly work overtime.
  2. Pay overtime in addition to the employee's current salary when necessary: Employers also can continue to pay their newly overtime-eligible employees the same salary, and pay them overtime whenever they work more than 40 hours in a week. This approach works for employees who work 40 hours or fewer in a typical workweek, but have occasional spikes that require overtime for which employers can plan and budget the extra pay during those periods. Remember that there is no requirement to convert employees from salaried to hourly in order to calculate their overtime pay!
  3. Evaluate and realign hours and staff workload: Employers can ensure that workload distribution; time and staffing levels are all managed appropriately for their white-collar workers who earn below the salary threshold. For example, employers may hire additional workers.
  4. Determine how reclassification of some employees as nonexempt employees will affect their eligibility for employee benefits offered by the employer:  Some employers have different benefit eligibility requirements for salary and hourly employees.

It is important under these new regulations for employers keep certain records to ensure that workers get paid the wages they earn and are owed. It's up to the employer to choose the method that works best for them and the needs of their workforce. There's no requirement that employees "punch in" and "punch out." Employers have flexibility in designing systems to make sure appropriate records are kept to track the number of hours worked each day.

For a copy of the final regulations, please click on the link below:

https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-11754.pdf

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