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The Department of Labor Issues Final Overtime Rule

Thursday, May 19, 2016  
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Effective Dec. 1, the rule guarantees time-and-a-half pay to anyone making less than $47,476 per year

On Wednesday, May 18, the U.S. Department of Labor (DOL) issued final changes to the regulations governing which employees are entitled to overtime pay protections under the Fair Labor Standards Act (FLSA). Here are the highlights of the final rule:

  • The salary threshold under which virtually all employees are guaranteed time-and-a-half overtime pay will increase from $23,660 to $47,476 per year. This threshold will be automatically increased every three years, with the first update due on Jan. 1, 2020, to an estimated $51,168 per year.
  • The "highly compensated employee" salary threshold will increase from $100,000 to $134,004 per year. Under this threshold, only a minimal showing is needed to demonstrate an employee is not eligible for overtime.
  • Up to 10 percent of the salary level can be met with commissions and "non-discretionary" bonuses. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, however, such payments must be paid on a quarterly or more frequent basis.The new levels will be effective on Dec. 1, 2016, a Thursday, which means that salary adjustments must be made for the workweek (or pay period) that includes Dec. 1.

This rule is final. There is a chance it could be overturned by a court or through legislation in Congress, but given the Department's clear authority to set these salary levels and the current political balance between Congress and the Obama Administration, such challenges are likely to fail.

 

Analysis

 

Out of economic necessity, businesses of all shapes and sizes, will need to take steps to lessen the impact of the new rules. As a result, not all of the 4.2 million workers DOL says will become newly eligible for overtime will actually see a pay increase. Rather, according to a recent POLITICO article, "Only about one-fifth as many will actually see a pay hike." The rest of these formerly salaried workers won't, because their employers will convert them to hourly status and reduce their hours to 40 hours per week so they don't have to pay time-and-a-half. Similarly, a study released by the National Retail Federation predicted that "employers would adjust compensation schemes to ensure they do not absorb additional labor costs. To do this they could...lower hourly rates of pay to leave total pay largely unchanged; cut bonuses and benefits in order to increase base salaries above the new threshold; and reduce some workers' hours to fewer than 40 per week in order to avoid paying overtime, cutting compensation proportionally."

 

Along the same lines, DOL suggests the following options for dealing with the new rules:

  • Raise Salaries: Employers may choose to raise the salaries of employees who otherwise meet the test for exemption to at or above the new salary level to maintain their exempt status.
  • Pay Overtime Above a Salary: Employers also can continue to pay employees a salary but pay overtime for hours in excess of 40 per week. You would have to create a system, however, to keep records of how many hours these employees work.
  • Reorganize Workloads, Adjust Schedules or Spread Work Hours: Employers may wish to reorganize workload distributions or adjust employee schedules so as to ensure that overtime-eligible employees will not work more than 40 hours each workweek.
  • Adjust Wages: In the case of an hourly employee, employers can adjust the amount of an employee's earnings to reallocate it between regular wages and overtime so that the total amount paid to the employee remains largely the same.

Additional information can be found on the Department of Labor's website.


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