Overtime Rule Changes What Does It Mean For My Organization?

By Joyce Chastian, Senior Consultant, The Krizner Group

On May 17, 2016, the much-anticipated revised Fair Labor Standards Act (FLSA) overtime regulations were announced. 

The key components of the new regulations are:

  • The minimum salary will be $47,476 for those positions that are subject to the salary minimum test.
  • The total annual compensation for highly compensated employees is set to a minimum of $134,004.
  • The salary minimum amounts will be reviewed and potentially updated every three years (beginning January 1, 2020) to ensure that they keep pace with inflation.
  • For the first time ever, the rule allows for up to 10% of the minimum salary threshold to be comprised of bonuses, incentives and/or commissions.
  • The effective date of the new regulations is December 1, 2016.

The FLSA is a federal statute of the United States, administered by the Department of Labor that establishes minimum wage, overtime pay, recordkeeping, and child labor standards.  This statute applies to all employers who have annual gross revenues of $500,000 or more.  However, it’s important to note that employees of organizations with less than $500,000 may still be protected by the FLSA individually, if they are engaged in interstate commerce.  Such employees are described as working in the production of goods that will be sold across state lines, use mail and telephones to conduct business across state lines, or maintain records of interstate transactions.  So, as you can see, it’s broadly defined and includes virtually every worker.

The FLSA defines some workers as “exempt” from the overtime rules.  Non-exempt employees are paid overtime pay for all hours worked in excess of 40 in a work week.  Exempt employees are not.  There are three tests to determine if an employee qualifies for the exemption status. All three tests must be met in order for an employee to be exempt from overtime payments.

1. Duties Test.  This is the most complex of the three tests and the area where the Department of Labor focuses most of their compliance audits.  It is strongly recommended that you have an external audit performed of the job duties assigned to each exempt individual to ensure that the position is correctly classified.  We provide here a brief explanation of the roles that qualify for exemption as well as a description of the required primary duties:

    • Executive Exemption – manages the enterprise or department of enterprise and supervises two or more full-time employees;
    • Administrative Exemption – general business operations manager with authority to make independent decisions in matters of significance to the organization;
    • Professional Exemption – performs predominately intellectual work requiring advanced knowledge in field of science or learning requiring exercise of discretion; 
    • Creative Professional – performs work requiring invention, imagination, originality or talent in artistic field;
    • Computer Professional – applications of systems analysis, determines hardware, software or system functional specifications, designs or tests systems/program/ software;
    • Outside Sales – primary duty is making sales outside of the employer’s place of business;
    • Highly Compensated – regularly performs one of the duties of the Executive, Administrative or Professional and earns greater than $134,004

2. Salary Basis Test.  An employee receives a predetermined amount of pay each pay period which is not reduced based on hours worked.  In other words, an exempt employee is hired to do a job—not hired to work a set number of hours.

3. Salary Amount Test.  This is the part that is being changed by the revised regulations.  Beginning December 1, 2016 exempt employees will need to be paid $47,476 per year in order to qualify for the exemption from overtime payments.  (School teachers, attorneys, physicians and outside sales workers are excluded from the Salary Amount Test.)

Organizations should prepare now for the effective date of the changes.  Here are some suggested steps:

  1. Identify all positions that are currently classified as exempt that are paid less than $47,476 per year.
  2. Develop a plan for how you will respond.  Will you increase the salary of those employees identified in Step 1 to $47,476 or reclassify the position to non-exempt status?  And, if you reclassify the position to non-exempt, will you maintain the current salary level given the position will now be overtime eligible? 

This is the most substantial revision to the salary amount test of the Fair Labor Standards Act in history.  It is expected to impact millions of workers—many of whom will be reclassified to non-exempt status.  With that reclassification, behaviors will need to change.  Expectedly, organizations will not want to pay premium overtime pay for completion of duties that previously were covered with base salary.  So, there may need to be a realignment of responsibilities to those reclassified workers. 

The impact to your organization could be significant.  Talk to your organizational leaders and managers to develop a plan of action.  Then, talk to the employees who will be affected by these changes to let them know you are transitioning into compliance with the new regulations.  And, do this soon.  Employees need to know and prepare for how their roles may change under these new rules before the effective date of December 1, 2016.