With the stroke of a pen, President Obama updated the Department of Labor’s rule updating overtime regulations, which will automatically extend overtime pay protections to more than 4 million workers within the first year of implementation. This long-awaited update will result in a boost to many workers’ wallets, but what affect will it have on business owners and their bottom line? We have compiled answers to some of the most frequently asked questions regarding the changes set to begin taking effect by the end of the 2016 calendar year.
Q: How is the new overtime rule going to affect my company?
A: Most businesses are covered by the Fair Labor Standards Act (“FLSA”). Unlike other federal employment laws, coverage by the FLSA does not depend on number of employees. Therefore, it is highly likely that your business is covered and must comply with the recent changes to the law.
Q: What are the changes?
A: In order for a business to be exempt from paying overtime, the regulations require that each of three tests be met:
- The employee must be paid a fixed salary;
- The amount of the salary must meet a minimum amount; and
- The employee’s actual job duties must primarily involve executive, administrative or professional duties as defined by the FLSA.
The changes to the law impact the second part of the test — minimum salary amount. The minimum salary for covered exemptions will increase to $913 per week ($47,476 per year). The new minimum salary represents the 40th percentile of earnings for all full-time salaried workers throughout the United States.
In addition, the minimum salary that an employee must earn to meet the “highly compensated” exemption will increase from $100,000 to $134,004 per year, which is tied to the 90th salary percentile. The salary threshold will be automatically updated every three years, beginning Jan. 1, 2020. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers, estimated to be $51,168 in 2020. The USDOL will post new salary levels 150 days in advance of their effect date, beginning Aug. 1, 2019. Significantly, the final rule does not make any changes to the third part of the test — the “duties test.”
Q: What is the impact?
A: Employees who are currently considered exempt from overtime might be entitled to overtime beginning Dec. 1, 2016 if they do not make at least $47,476 per year or $134,004 (for employees who are exempt under the “highly compensated” exemption).
Q: What Best Practice Should a Business Implement?
A: Businesses have several options:
- Increase an employee’s salary to meet the minimum salary test;
- Continue to pay the employee’s current salary and overtime (carefully monitor overtime policies and practices); or
- Evaluate and realign the employee’s work load which may include hiring additional employees.
It is important that businesses take the opportunity now to conduct wage audits, review wage scales and handbook policies to identify employees whose status may change to non-exempt in order to prepare for any financial impact.