The Fair Labor Standards Act (“FLSA”) requires that virtually all employees be paid at least the federal minimum wage for hours worked, plus overtime (at time and a half the employee’s base pay) for any hours over 40 in any given work week. On December 1, 2016, new rules for overtime pay will go into effect, making more executive, administrative and professional (“EAP”) employees and highly compensated employees (“HCEs”) eligible for overtime.
Some employees, including executive, administrative and professional employees, are considered “exempt” from the FLSA’s overtime and minimum wage requirements. To qualify for the so-called EAP exemption, an executive, administrative or professional employee’s position must satisfy three tests that focus on how the employee is paid and the type of job duties they perform:
There is also an exemption for highly-compensated employees, who are exempt if they (1) customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional employee and (2) earn a minimum specified amount in total annual compensation.
New Overtime Rule: Increased Salary Levels
The new overtime rules will update the salary and compensation levels needed for the executive, administrative and professional employees exemption. Beginning December 1, 2016, to be exempt from overtime payments, the salary level test for EAP employees will increase from $455 per week to $913 per week ($47,476 annually for a full-time employee). Similarly, the total annual compensation for highly compensated employees will increase from $100,000 annually to $134,000 per year.
The new overtime rules will also automatically adjust these salary and compensation levels every three years. Going forward, the minimum salary level for EAP employees will be at the 40th percentile of earnings of full-time salaried workers in the lowest Census Region. The total annual compensation for highly compensated employees will be at the 90th percentile of full-time salaried workers nationally. These automatic adjustments will begin on January 1, 2020.
The new overtime rules also amend 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.
Three Steps to Complying With the New Overtime Rules
First, ensure that all employees are properly classified as either exempt or non-exempt from the overtime requirements under the new overtime rules.
Second, compare the cost of raising employees’ salaries versus paying employees overtime.
Third, consider the impact to internal pay equity (i.e., whether employees are paid fairly when compared with other employees in the company). Now is a great time to consider pay equity issues; don’t minimize the risk of a wage and hour lawsuit just to set the company up for a discrimination lawsuit.
Employers have until December 1, 2016, to comply with the new overtime rules. Begin planning for the changes now. Employers can visit the Department of Labor or Ask an Attorney to learn more.