Department of Labor Overtime Changes Bring New Wrinkle to Employers

As I talk to employers in various industries, one of the most common misconceptions that I hear time and time again is that as long as an employee is paid salary, there is no need to worry about paying overtime. This statement is not entirely true and exposes employers to investigation, liability, and penalties.

To compound this misconception, today, the Department of Labor (DOL) final regulations were published making changes to the rules governing overtime exemptions under the Fair Labor Standards Act (FLSA). The new rule includes a significant increase to the salary threshold and automatic increases in the future.

Under the OLD rules, in order to be “exempt” from overtime under the FLSA employees must meet ALL of these requirements:

1. Be paid salary irrespective of the number of hours worked
2. Meet the income threshold of $455/wk or $23,660 year
3. Be classified within one of the exempt classifications according to the employee’s “duties test” of Administrative, Professional, Executive, or Computer Employee Exemption

While an employee may be salaried, if they do not earn the income threshold or meet the duties test under the federal regulations to come within the exempt classifications, overtime would still be required.

The key provisions of the Final Regulations issued by the DOL on May 18, 2016, do not change the three-part test above, but they do change the salary component:

1. The new salary threshold is now $913/week or $47,476 per year. In order to be classified as exempt from overtime, employees must meet this salary threshold.
2. The salary threshold will be adjusted every three years.
3. The duties test is unchanged. We must still review the actual work performed to determine if an employee is actually classified within exempt-type work.
4. The Highly Compensated Employee Exemption subject to a minimal duties test is now $134,004 per year.

The effective date of these new regulations is December 1, 2016. These rules will have a significant impact on companies in every industry, as they now must reevaluate their employee roster, employee classifications, and their job duties. Employers and HR professionals should review their current employees immediately to determine which employees will be affected, and how and whether to reclassify the employees prior to the effective date.