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The U.S. Department of Labor More Than Doubles the Salary for Employees to be Exempt from Overtime

May 20, 2016

Cohen Seglias Author(s) Marc Furman & Jonathan Landesman

One of the most significant changes in wage and hours law in decades was announced this week: the U.S. Department of Labor just published the new overtime exemption rules. This rule change was in the works for more than a year and its announcement was highly anticipated – if not widely feared and despised. And, as anticipated, it places a much higher restriction on an employer’s ability to classify employees as “exempt” from overtime – and increases the minimum salary requirement for the overtime exemption up to $47,476.

This change will apply to virtually every single employer and – depending upon the composition of your workforce – it may have a very significant impact on your bottom line. Here is what you need to know to begin planning for the effective date of the rule change.

Under the federal wage and hour law, the Fair Labor Standards Act, employers are allowed to treat certain types of employees as “exempt” from the overtime rules. Stated otherwise, when a worker is appropriately classified as “exempt,” you do not have to pay them the time-and-half overtime premium for the hours worked in excess of 40 in a workweek.

The different categories of workers that can qualify as overtime exempt are: administrative, executive, professional, computer professional, and outside sales employees. There is also another “catch-all” category for “Highly Compensated Employees,” or HCEs.

There are three sets of rules that determine whether an employee fits into one of these categories. One set of the rules are the “duties” tests – an employee’s actual work duties must meet various benchmarks to meet the different requirements for each of the above categories. Although there were proposed changes to these rules, they were not changed at this time. The second set of rules are called the salary basis rules and prohibit docking or making deductions from an exempt employee’s pay except in limited circumstances.

The last rule sets the minimum salary level for the overtime exemption to apply. This is the rule that was changed – and it has been met with widespread criticism because it has more than doubled the amount that employers must pay their employees in order to qualify as “exempt.” Under the prior rule, employees who met the duties test and fell within one of the above categories had to be paid a salary of no less than $455 per week, or $23,660 annually, to be exempt for overtime. Under the new rule, an employee must be paid a salary of no less than $913 per week, or $47,476 annually, to qualify as exempt and meet the salary test.

For HCEs, the increase in the salary amount was not quite as dramatic, but it was still very significant. An employee qualified as an HCE under the old rules if they performed office or non-manual work and received total annual compensation of $100,000. Under the new rules, HCEs must be paid at least $134,004 per year – a more than 1/3 increase over the old rules – to qualify as overtime exempt.

The one “silver-lining” in the rule change is that employers are now permitted to apply up to 10% of nondiscretionary bonuses and incentive payments to the new thresholds. However, such amounts must generally be paid no less than quarterly, or more often.

The new rule goes into effect on December 1, 2016 – so there is no time to waste. Every employer should assess the impact the rule change will have on your company, determine what options you have, and decide what actions you will need to take.

Employers can and should, at the same time, use this as an opportunity take a close look at its existing classification of employees as “exempt” and ensure you do not have any classification violations. This means reviewing with counsel what your “exempt” employees actual job duties are, and whether this meets the “duties test” for their exemption category.

Since a large component of wage and hour lawsuits involve this type of misclassification - and those claims grow every single day that an employee remains misclassified - this can be a costly mistake. It is one that no employer can afford to be making.

But that is not all – and employers will need to become used to reviewing their employees’ classifications more regularly. This is because both of the above dollar thresholds will automatically change and be adjusted every three years beginning January 1, 2020 (the salary threshold is pegged to 40% of weekly earnings in the lowest census region, and the HCE threshold is pegged to 90% of full time workers nationwide).

The Labor and Employment Group of Cohen Seglias Pallas Greenhall & Furman PC stands ready to assist you in reviewing your workforce classification and compensation structure and help you plan for this dramatic change in the wage and hour laws.