On May, 18 2016, President Obama and Secretary of Labor Thomas Perez released the much-anticipated final rules that increase the “white collar” salary overtime exemption threshold under the Fair Labor Standards Act (FLSA). The new regulations will take effect on Thursday, December 1, 2016.
The revised overtime pay regulations, which are estimated to affect at least 4.2 million American workers, will increase the salary threshold for the overtime exemption from $455 a week ($23,600 annually) to $913 a week ($47,476 annually). As a result of these regulations, businesses will need to start tracking hours for exempt salaried employees who are at or below the $47,476 threshold.
Another segment of workers that will feel the impact of the new regulations are “highly compensated employees” (HCEs). The minimum salary for employees exempt under the “highly compensated” employee” exemption will increase to $134,004 from a previous amount of $100,000.
All employers, and specifically small business owners, should have a plan in place for each of their affected employees, as they may become eligible for overtime pay. Depending on their current salary, their role, the classification of their role, and the number of hours they work, each employee will have a different result. Employers should begin initiating a list of every current exempt and non-exempt employee and their compensation to make the best decisions for their organization.
The new minimum salary levels will be adjusted every three years beginning January 1, 2020. The salary level will be fastened to the 40th percentile of full-time salaried workers in the lowest wage Census region. For 2020, the Department of Labor has estimated that the minimum salary level will increase to $51,168. The minimum level for highly HCEs will be affixed to the 90th percentile of full-time salaried workers in the lowest wage Census region, at which the DOL has approximated to be $147,524 by 2020.
One unanticipated allowance that was provided in the new regulations allows for the employer to include non-discretionary bonuses, incentive payments and commissions to count for up to 10% of the minimum salary requirement, provided these amounts are paid at least quarterly. Higher education institutions and non-profit entities are among the employers also affected. There was early speculation that these sectors may be afforded some “carve-outs” upon the release of the final regulations, yet that appears not to be the case.
As many employees will becoming eligible for overtime pay, employers are faced with a number of looming decisions. An employer could increase salaries up to the exemption threshold, whereby eliminating the requirement of overtime pay. This scenario may work if the employee is close to the salary threshold and works a larger number of overtime hours. If employers decide to not limit overtime, they will naturally incur additional costs for each employee. It will be crucial for employers to understand exactly how many hours their employees are working to make sure they appropriately structure their new pay. Other employers may choose to prohibit overtime without previous authorization. This option will likely reduce the number of hours some employees work. This could be seen as a benefit, but it may also mean that affected employees cannot accomplish the same amount of work in the shorter time frame.
Having an accurate calculation of hours worked per week will be essential as employers seek to comply with these new regulations. Employers will need to have a time and attendance tracking system that helps them accurately manage their employees’ hours within their payroll.
The DOL estimates that the new rules will result in approximately 35% of all full-time, salaried workers being eligible for overtime based on their salary level alone. Therefore, it is crucial that employers start planning now. Do not let December 1, 2016 sneak up on you without addressing these new overtime regulations.
If you have any questions on how the new overtime rules may specifically impact you and your employees, please do not hesitate to contact us, so that we may be able to assist you in ascertaining proper compliance prior to the enactment date.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog.