Employment Law for Contractors
Labor Department Raises Overtime Exemption Levels
On November 22, 2016, a federal judge blocked implementation of the new overtime
rules discussed below, pending a final ruling in a legal challenge mounted by 21
In the News:
to Pay $48,000 in Back Wages, Damages (Arizona Republic, July 26, 2016)
On May 18, 2016, the U.S. Department of Labor (DOL)
announced changes to the Fair Labor Standards Act that will sharply increase the
minimum salary requirement for overtime-exempt employees. The changes go into
effect December 1, 2016.
Under the current rules, the minimum salary threshold to
qualify for the overtime wage exemption is $455 per week ($23,660 per year).
After the new regulations kick in, the minimum salary level for qualifying for
the exemption will double, to $913 per week or $47,476 per year.
The minimum salary will be automatically updated every
three years, beginning in 2020. An increase that doubles the current minimum
salary test will have a significant impact on companies that have managers,
professionals and administrators who are exempt under the current regulations
but are making less than $47,476 per year.
The new regulations will, for the first time, allow
employers to use nondiscretionary bonuses and incentive payments to satisfy up
to ten percent of the salary level, so long as those payments are made on a
quarterly or more frequent basis (but note that there are different requirements
for highly compensated employees, i.e., workers whose total annual
compensation, under the changes that go into effect December 1, is at least
You have an office worker, Bob, to whom you pay a $500
weekly salary. In an average week, he works 50 hours and is exempt from overtime
Under the new regulation, Bobs $500 weekly salary will
be $413 below the $913 per week minimum to qualify for the overtime exemption.
If you pay him $12.50 an hour ($500 divided by 40) and he continues to work 50
hours a week, he will earn 10 hours of overtime pay at the rate of $18.75 per
hour. Bobs total pay would go from $500 under the current rules to $687.50
under the new rules.
Whats Behind the New Rules
According to a July 7, 2015, National Law Review
article (Exempt Status in Jeopardy: FLSA Salary Requirements Skyrocket), the
Labor Department suspects that 85% of all white-collar workers who are
classified as overtime-exempt pass the salary test but fail the duties test
and should not be exempt. (In other words, their job duties do not meet the
standards for Executive, Administrative and Professional positions for which
the overtime exemption was originally intended.) Thus, the DOL decided to
increase the objective salary requirements in an effort to more strictly apply
The article speculates that the DOL might also revise
the duties tests associated with various exemptions and add job classes for
potential exempt status. According to the
frequently asked questions that the DOL published with the final rule, the
standard duties test is unchanged.
What to Do
Various observers suggest that, while you are waiting
for the new rules to go into effect, you take a few steps to cut your losses:
Audit your exempt employees workloads to determine
your likely overtime exposure.
Recognize which employees work weeks can be capped at
To avoid excessive overtime for reclassified
positions, consider the cost of additional full-time or part-time employees.
Consider whether current exempt positions are
Review your exempt job descriptions to make sure they
accurately describe the duties performed and discretion used.
The new regulations do not require that employees
earning a salary of less than $47,476 per year be paid on an hourly basis.
Employees may continue to be paid a salary, but the employer will be
required to pay overtime on the salary if the employee works over 40 hours per
week. Companies should consult their employment attorney regarding overtime
requirements and methods of calculating overtime for nonexempt salaried
Another thing to keep in mind: Under the automatic
increase to the minimum salary level that will occur every three years,
employees who are near the minimum salary level will be required to be given a
raise annually to keep up with the minimum salary increases that begin in 2020.
Your business planning and budgeting should account for the automatic increases.