BREAKING! U.S. Department of Labor: Employees Earning Less than $47,476 are Entitled to Overtime

May 18, 2016

By:  Rachel D. Gebaide and Timothy C. Haughee

The U.S. Department of Labor (DOL), at the direction of the White House, issued the long-anticipated final rule that substantially increases the minimum pay threshold necessary for certain “white-collar” administrative, professional, and executive employees to be classified as “exempt” salaried employees and therefore ineligible to receive overtime pay.  The new threshold of $47,476 ($913/week) is expected to make roughly 4.2 million additional workers eligible to receive overtime pay when the new rule takes effect on December 1, 2016.

Prior to the new rule, the Fair Labor Standards Act (FLSA) provided that certain employees would be exempt from the FLSA’s overtime pay requirements based on their job duties, provided that they were paid on a salary basis of no less than $455 a week ($23,660 annually).  Over the years, this minimum salary basis has fallen below the federal poverty level for a family of four.  Under the new rule, the minimum salary basis has virtually doubled to $913 a week ($47,476 annually).  Therefore, as of December 1, 2016, all employees earning below $47,476 annually ($913 a week) must be classified as “non-exempt” employees and be paid one and one-half (1 ½) times their regular rate of pay for all hours worked in excess of forty hours in a work week, even if those employees had been previously (and properly) classified as “exempt” salaried employees under the lower threshold. 

In addition, under the new rule:

  • when determining whether an employee’s pay meets the threshold, employers are permitted to count nondiscretionary bonuses and incentive payments (including commissions) paid to employees, up to 10% of the threshold, so long as those bonuses and incentive payments are made on at least a quarterly basis.For example, if an employee makes $44,000 annually and receives a $4,000 bonus, the employee’s total income ($48,000) will mean that the employee will remain exempt from overtime;

  • the new $913/week threshold will be updated every three years, beginning on January 1, 2020, to reflect the 40th percentile of full-time salaries in the lowest income region of the country (announcements of updates will be made at least 150 days in advance of the effective date of the updates); and

  • the total annual compensation requirement for certain “highly compensated employees” has been increased to $134,004, which is the annual equivalent of the 90th percentile of full-time salaried workers nationally.

Notably, the new rule did not revise the current “duties tests” for the administrative, professional, and executive classifications.  As such, employers will still need to consider the duties tests when analyzing the proper classification of their employees, since the minimum salary threshold is just one aspect of the classification analysis.

Employers will need to adjust to the requirements of the new rule before it takes effect on December 1, 2016, and will have several options.  Employers may decide to increase the salaries of some or all of their affected exempt salaried employees in order to meet the new threshold.  Alternatively, employers may decide to convert their exempt salaried employees to non-exempt hourly employees. 

In that regard, the employer may need to closely monitor the hours worked by the reclassified employees in order to limit the amount of overtime pay due to them.  If, however, the employer needs its reclassified employees to continue to regularly work more than forty hours in a given work week, the employer will either need to be prepared to pay those employees overtime pay or reduce the employees’ regular rate of pay to account for the expected overtime work.  Those employers will also need to closely monitor and manage the morale of the reclassified employees, who may feel that their reclassification as non-exempt hourly employees (and the requisite tracking of time) diminishes their stature within the company.  Of course, employers will also continue to have an affirmative legal duty to maintain accurate time records for all non-exempt employees, including any employees that are being reclassified as non-exempt in light of the new rule.

According to the DOL, the new rule was implemented to expand access to overtime pay for otherwise exempt, low-salaried workers who work long hours but were not entitled to receive overtime pay because they performed some managerial or other important administrative duties.  Consequently, the new rule will likely affect the retail, hospitality, governmental, and non-profit industries the most, but it will undoubtedly touch almost all sectors.