New Overtime Rules for Salaried Employees Earning Less than $47,476 Per Year
4.2 Million Workers Will Be Entitled to Overtime Pay
On May 18, 2016, the Department of Labor announced much-anticipated changes to exemptions under the Fair Labor Standards Act (FLSA) regulations governing “white collar” workers. Effective December 1, 2016, the new rule will raise the threshold for exempt salaried employees from $23,660 per year to $47,476 per year, resulting in significant increases to minimum salary levels if workers are to be properly classified as exempt executive, administrative, or professional employees.
Under the new rule, 4.2 million workers nationwide are expected to become eligible for overtime, including 40,000 workers in Kansas and 85,000 workers in Missouri.
The new rule:
- will increase the minimum salary level for exempt “white collar” workers from $455/week ($23,660 annually) to $913/week ($47,476 annually)
- raise the highly compensated executive (HCE) threshold from $100,000 to $134,000, and
- automatically update every three years to ensure income levels continue to provide a useful and meaningful test for exemption.
See the Federal Register's website for the full text of the Final Rule adopted by the Department of Labor's Wage and Hour Division.
First Revision to White Collar Overtime Rules Since 2004
In March 2014, President Obama directed the Department of Labor to update and modernize regulations defining which white collar workers are currently protected by the minimum wage and overtime standards of the FLSA, or Fair Labor Standards Act. Through the new rule, President Obama and the Department of Labor seek to ensure that the FLSA’s intended overtime protections are fully implemented, and to simplify and modernize the identification of workers who are eligible for overtime pay by making the exemption easier for employers and employees to understand and apply.
Non-Exempt Workers Are Entitled to Overtime
The new rule updates the regulations for determining whether white collar workers are “exempt” from the FLSA’s minimum wage and overtime protections. Under the FLSA, employees who are not “exempt” must receive overtime pay at a rate not less than 1 ½ times their normal hourly pay rate for hours worked in excess of 40 hours per week.
To be classified as “exempt” an employee must:
- be salaried (i.e. receive a fixed amount of money per year that does not vary due to the quantity or quality of work performed) (the “salary basis test”)
- under the new rule, be paid more than $913 per week (the “salary level test”), and
- primarily perform executive, administrative, or professional duties (the “duties test”)
If an employee does not meet all three of these criteria, he or she is not properly classified as an “exempt” employee. If an employee is not “exempt” then he or she is entitled to the minimum wage and overtime protections of the FLSA.
Calculating the Minimum Salary Level for Exempt Employees
The new minimum salary level for exempt employees is equivalent to the 40th percentile of earnings in the lowest paid census region, currently the South. To prevent the “salary level test” from once again becoming outdated and ineffective, the Department of Labor will update the minimum salary level for exempt employees to be equivalent to the 40th percentile of earnings in the lowest paid census region every three years.
For the first time ever, the Department of Labor will allow employers to use non discretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the salary level test, as long as these payments are made at least quarterly.
Compliance With the New Guidelines
To come into compliance with the new rule, employers can:
- pay time-and-a-half for over-time worked (time greater than 40 hours per week)
- raise salaries above $47,476 for employees who meet the “duties test”
- limit the employee’s time to no more than 40 hours per week, or
- some combination of the above
Employees earning under or around $55,000 per year are frequently misclassified as exempt. These people are often assistant managers, customer service representatives, and in sales support roles. Before considering the new minimum salary requirements, employers must first consider whether the employee’s duties are truly of an executive, administrative, or professional role.
