Fair Labor Standards Act - Overtime Regulations Update

By:  Landon K. Richmond, J.D.

Do you employ workers who receive a salary? Understanding recently adopted overtime changes will soon be essential.

The Department of Labor (DOL) recently issued its Final Rule modifying the Fair Labor Standards Act (FLSA). These regulations increase the number of workers entitled to overtime compensation. The FLSA guarantees a minimum wage and overtime pay at a rate no less than one and one-half times an employee’s regular rate for hours worked over 40 in a workweek. While these protections extend to most workers, the FLSA provides a number of exemptions. These new regulations relate to exemptions, and the DOL requires employers to analyze their workforces to ensure compliance with the updated regulations.

Currently, the minimum salary a worker has to be paid to be exempt from overtime is $455.00 per week or $23,660.00 per year. Under the new regulations, it will increase to $913.00 a week or $47,476.00 per year. The new regulations will also increase the highly compensated employee threshold from $100,000.00 to $134,004.00 annually. And the regulations provide an automatically updating system for salary and compensation levels once every 3 years.

In the Final Rule the DOL stated:

The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:

  1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
  2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
  3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption

The Final Rule also amends the salary basis test, allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) to fulfill up to 10% percent of the new standard salary level.

The initial salary level increase ($455 to $913) and the total annual compensation requirement increase ($100,000 to $134,004) will take effect on December 1, 2016. These thresholds will be automatically updated every three years, beginning on January 1, 2020.

Within the first year of implementation, the DOL anticipates the new regulations will automatically extend overtime pay to over 4 million workers. As the DOL stated, the new regulations “will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.” The federal government believes the new regulations will generate approximately $1.2 billion in added overtime compensation within the first year.

With less than 6 months before the new regulations take effect, employers should begin formulating a plan. Employers should identify employees who might be affected by the increased salary test. In order to see how they will be affected, employers may wish to start tracking hours of employees who are currently exempt.  Failures to comply with the new regulations, either willfully or inadvertently, will likely subject employers to penalties and costly litigation.

If you have any questions about this article, contact a member of Yoder Ainlay Ulmer & Buckingham’s Employment Law Practice Group at (574) 533-1171.

Disclaimer: These materials are for informational purposes only and should not be construed as legal advice on any specific facts or circumstances. We recommend you consult a lawyer if you want professional assurance that your interpretation of these materials is appropriate to your particular situation.

 ©  Yoder Ainlay Ulmer & Buckingham, LLP [June 2016]