United States: Digging Into The New Overtime Regulations

Within the Department of Labor's aggressive regulatory agenda in the last few years, its proposed regulations on the white collar exemptions from overtime generated some of the most significant concerns and anticipation for employers.  In 2015, the Department of Labor ("DOL") proposed substantial changes to the minimum salary level requirements, sought input on whether bonuses and incentives should be included in meeting the salary level test and considered changing the duties test to establish overtime eligibility.  Taken together, these proposed changes would have had a drastic effect on the obligation of employers to pay overtime.  On May 18, 2016, DOL issued its Final Rules and employers have until December 1, 2016 to comply.  Overall, the changes strike a middle ground as DOL declined to adopt the more restrictive California 50% duties test.  However, doubling the salary level threshold and other changes present significant economic and compliance challenges for employers.  Below is a summary of key takeaways and steps employers should consider to address these changes and ensure compliance.

Duties Test Remains the Same:  It was widely believed that DOL was leaning towards changing the test that an employer would need to satisfy to demonstrate that an employee qualified for the executive, administrative or professional exemption from overtime.  Based upon language in the proposed regulations,  DOL strongly signaled that it would change the duties test and look to adopt the more restrictive test in California where employees would have to spend at least 50 percent of their time performing exempt duties to qualify for the exemption.  However, in the final regulations, the DOL adhered to the existing test and the critical question remains whether an employee's primary duty satisfies the administrative, professional or executive definitions.

Exempt employees must earn a salary level of at least $47,476 ($913/week):  With the new regulations, the requirement that exempt employees must be paid a salary remains the same, but the minimum salary threshold will almost double to $47,476 per year.  This final number is less than the $50,444 in the proposal but still marks a substantial increase in salary requirements for exempt employees.  The DOL's final regulations also rejected requests to exclude educational and other non-profit employers from the salary increase.  To ensure compliance, employers will need to look at all of their employees currently classified as exempt who are earning less than $47,476 and assess (i) whether they remain comfortable that the duties performed satisfy the exemption requirements; and (ii) if the duties test is satisfied, whether they want to increase the salary level or whether it would be more cost effective to pay overtime to the employees.  As more employees enter the overtime eligible category, employers will have to pay special attention to employees who telework or who have flexible schedules.  While the FLSA does not mandate that these workers "punch the clock," more employees will need to track their time in a way that employers can ensure that they are not working more than 40 hours a week.  This makes training employees and managers paramount as the potential liability increases.

Salary level indexed every three years:  DOL's proposal included a provision that the salary level would be automatically indexed on an annual basis.  The final regulation calls for updating the salary level every three years.  While this represents some reprieve for employers, it leads to compliance challenges.  The new regulations ensure that employers will be re-evaluating their exempt employee population every three years when the salary level will be adjusted.  With each salary change, employers will again need to examine whether it remains confident that the duties test is satisfied, and, if so, whether the employer wants to again increase the salary level or forego exemption.  This reexamination of classifications every three years is likely to result in even more non-exempt employees over time.  Nonetheless, the salary indexing remains subject to a legal challenge as it is unclear whether the Fair Labor Standards Act gives DOL the authority to index.  

Inclusion of nondiscretionary bonuses and incentives:  For the first time, the DOL will allow employers to satisfy the salary level test with non-discretionary bonuses, commissions or other incentives as long as they are paid quarterly and do not exceed 10% of the $47,476 salary level.  The regulations also give employers the opportunity to provide a "make up" payment if due to poor sales in the quarter, for example, the anticipated commissions render the employee's quarterly salary below the new salary threshold.  This presents perhaps the most complex compliance concern.  Paying and accounting for bonuses and incentives on a quarterly basis represents a new way of operating for many employers who are used to performing this function on an annual bases.  Managers will need to be mindful of whether production bonuses or other incentives are sufficient for employees to reach the salary threshold but also not large enough to surpass the 10% limit.  This is another area for training of managers and compensation professionals.

Highly Compensated Employees: The separate exemption for "highly compensated employees" where the employee need only perform one of the exempt duties or responsibilities to satisfy the exemption, will now apply to employees whose annual salary is more than $134,004.  This is $34,000 more than the current level and $12,000 more than proposed.  This is one of the bigger surprises in the rulemaking.  While DOL claims that the large increase from the proposal is consistent with its attempt to keep this threshold at a level equal to the 90th percentile of earnings nationally, this is a significant increase and fewer employees will qualify for the reduced duties test.

The bottom line is that the Final Rules will have a major financial and operational impact on for-profit, non-profit and governmental employers.  The increase in the salary threshold, plus the increase in the salary level for the highly compensated exemption, means that millions of workers will now be eligible for overtime who were not previously eligible. Employers will need to make tough decisions about whether to reclassify workers, increase compensation levels and/or re-structure positions to comply with the new rules.  Employers who continue to treat employees as exempt under one of the white collar exemptions will also need to audit their workplaces to ensure that exempt employees meet the new salary level test, be prepared for the amounts to index, and train human resources and managers on how to calculate and track bonus and incentive payments.  Employers with non-exempt employees, especially those who telework or work flexible schedules, will need to closely monitor hours and reporting to make sure these workers do not inadvertently trigger overtime liability.

WEBINAR NEXT WEEK:  We will be hosting a one-hour webinar on Wednesday May 25, 2016 at 1 pm ET to review the new regulations and discuss their the impact on different industries, strategies for employer compliance, re-classification options, and litigation prevention, among other topics.

Register here for the webinar

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.