On May 18, 2016, the U.S. Department of Labor (DOL) announced its Final Rule to increase overtime eligibility for millions of U.S. citizens under the Fair Labor Standards Act (FLSA). This new rule will go into effect on December 1, 2016. While the Final Rule translates into greater costs for employers, it may save money in the long term by increasing retention of employees who are covered by the FLSA rules.
Who Is Covered by the FLSA Rules?
The FLSA provides Americans with the right to time-and-a-half compensation for time worked over 40 hours per week. The FLSA rules, including the Final Rule, cover employees of private enterprises or non-profit organizations with an annual gross volume of sales made or business done of $500,000 or more. The FLSA rules also apply to employees of federal, state, and local governments.
Additionally, employees not covered by the enterprise-wide basis rule may be covered individually by the FLSA rules if they regularly engage in interstate commerce. Courts have interpreted interstate commerce quite broadly: regularly using U.S. mail to send letters to other states or placing calls to other states using company telephones are considered to be examples of engaging in interstate commerce.
For an employer to claim that it is exempt from making overtime payments to a certain employee, three criteria must be met:
- The employee must be paid a fixed salary.
- The employee’s salary must meet a minimum salary level.
- The employee’s primary job duties must be the type of work associated with executive, administrative, professional, outside sales, or computer employees.
Increase in Minimum Salary Threshold
The DOL’s Final Rule governs the minimum salary level necessary for an employer to claim exemption status for overtime pay. The salary threshold for the white collar exemption has changed just once since the 1970s. For standard salaries, the Final Rule increases the salary level from $23,660 (or $455 per week) to $47,476 ($913 per week). For Highly Compensated Employees (HCE), the Final Rule also increases the annual compensation level to the 90th percentile of full-time salaried workers nationwide, i.e., from $100,000 to $134,000 per year. To prevent the salary threshold from becoming outdated in the future, the new FLSA rule mandates an automatic update every three years.
While not permitted in the past, employers may now use commissions, nondiscretionary bonuses, and other incentive payments to meet the salary threshold for exemption. There are limitations to this change. For example, only 10% of the salary level of the employee may be paid in the form of incentive pay, and it must be paid quarterly.
Employers must reevaluate their employees to determine which workers qualify for overtime. That determination must be based on the three tests summarized above, including the updated minimum salary threshold. Employers must also plan for the automatic updates to the minimum salary threshold every three years, beginning January 1, 2020. The Final Rule becomes effective December 1, 2016; this gives employers approximately six months to implement the changes necessitated by the updated regulations.