On May 18th, 2016 the Department of Labor released their highly anticipated final regulations for the overtime exemptions under the Fair Labor Standards Act.  These regulations will change not only how some employees are paid, but in some situations how employers do business.

As a quick reminder below are the three tests an employer must consider when making an employee exempt. All three tests must be true in order for the exemption to exist.

  • The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed, and
  • the amount of salary paid must meet a minimum specified amount (the salary threshold), and
  • the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test).

It has been estimated that 4.2 million employees will be affected by the new regulations, so all companies should be looking to see if any of their staff will be affected. Employers should be aware of the following key elements of the final regulations.

  1. Salary threshold changed to $913 per week or $47,476 per year. In order to be considered exempt from overtime an employee must make at least $913 per week or $47,476 per year. This is significantly higher than the current threshold of $455 per week or $23,660 per year.
  2. Highly compensated salary threshold changed to $134,004 per year. In order to meet the qualification for a highly compensated employee the employee must make $134,004 per year. This is significantly higher than the current threshold of $100,000 per year.
  3. Automatic salary thresholds increase every three years. The salary thresholds will be adjusted every three years based on the census of full-time salaried workers. The exempt status salary threshold will be maintained at the 40th percentile, while the highly compensated status salary threshold will be maintained at the 90th percentile. Employees must continue to be at or above the new threshold in order to remain exempt. The first increase will be January 1, 2020.
  4. Salary basis test amended. The amendment to the salary basis test will allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new salary threshold levels.
  5. No changes to the duties tests. The regulations do not change the duties test. An employee must meet the duties test to qualify for exemption.
  6. Effective December 1, 2016. Employers must have all employees classified correctly by December 1, 2016.

Employers need to spend the next six months getting ready to make appropriate changes in order to comply with the new regulations. Here are a few recommended next steps.

  1. Review current employees. Employers will need to look at their current staff and determine who will be affected by the changes. If there are staff currently categorized as exempt that will not meet the new salary thresholds employers will need to make a change to either the employees pay or their exemption status.
  2.  Make sure to review your benefits. If employee benefits are determined by their exemption status employers should review their insurance plans and determine if any changes need to be made.
  3. Review any policies that may be affected. Pay attention to policies that may need to be changed or revised because of staff being subject to overtime.
  4. Prepare a plan for communicating any changes. This change may be difficult for staff, going from exempt to non-exempt may have an effect on morale and engagement. A well thought out communication plan can help reduce some of the negative results these changes might have.
  5.  Be prepared for questions. Staff will have plenty of questions about how this change will affect how they do their job. Be prepared and if necessary provide appropriate training.

For more information on overtime regulations visit the Department of Labor’s website at https://www.dol.gov/general/topic/wages/overtimepay.