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What the DOL’s new overtime exemption rule means for employers, employees

Six months to comply


Published:

Michael Henckel

 

The U.S. Department of Labor (DOL) recently finalized its overtime exemption rule for employees classified as exempt under the executive, administrative, or professional exemptions (also known as the white-collar exemptions). The DOL is estimating that 4.2 million salaried employees will be affected by the rule change.

 

Employers will have six months to make adjustments to be in compliance with the new rule, which goes into effect on December 1, 2016.

 

Salary threshold

The final rule will raise the minimum salary requirement that has been in place since 2004.

·         Standard minimum salary. The salary threshold will increase from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). This revised number is equal to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region (currently the South).

·         Highly compensated employees (HCE). The HCE compensation threshold will be increased from the current $100,000 per year to $134,004 per year, which is equal to the 90th percentile of full-time salaried workers nationally.

 

Automatic updates

The DOL will require an automatic update to the salary and HCE thresholds every three years, beginning January 1, 2020. Each update will maintain the 40th and 90th percentiles. The DOL will post the new thresholds 150 days in advance of their effective date, beginning August 1, 2019.

 

Duties tests

No changes were made to the duties tests that determine whether or not an employee can qualify for an exemption. Employers may continue applying the same federal provisions that have been in effect since 2004. However, employers should be aware that state laws may require a more stringent analysis. An employee who qualifies as exempt under federal law does not necessarily meet the state requirements to be exempt (and could be owed overtime).

 

Bonus pay

The final rule will allow up to 10 percent of the salary requirement to be met by nondiscretionary bonuses, incentive pay, or commissions. These bonus payments must be made at least once every quarter.

 

Nondiscretionary payments are those promised to employees to encourage them to work more efficiently or to remain with the company. Examples include bonuses for meeting production goals, retention bonuses, and commissions based on a fixed formula.

 

In contrast, discretionary bonuses (which may not be counted toward the salary) are at the employer’s discretion and do not follow any preannounced standards. An example would be an unannounced bonus or spontaneous reward for a specific act.

 

Some exempt employees may already receive bonuses or incentive pay that makes up more than 10 percent of their compensation. Employers may continue providing such pay, but the amount that may be counted toward the minimum salary cannot be more than 10 percent of the required salary.

 

Employers may make “catch-up” payments if an employee doesn’t earn sufficient bonus or incentive pay during a calendar quarter or 13-week period in order to maintain the total compensation above the required level. Bear in mind, however, if the employee’s compensation was below the required level and the employer does not make the catch-up payment, the employee would be entitled to overtime pay for that quarter.

 

About the Author
Michael Henckel is an associate editor at J. J. Keller & Associates, a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Henckel specializes in topics such as the Fair Labor Standards Act, employee classification, and compensation. He is the author of J. J. Keller’s FSLA Essentials guidance manual. For more information, visit www.jjkeller.com/hr.

 

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