Department of Labor’s Final Rule on Overtime Signals Big Changes for Companies

CPAs & Advisors

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The U.S. Department of Labor (DOL) has issued the “Final Rule” version of its amendments to overtime pay requirements, affecting more than four million workers who may qualify for overtime pay. The new rules will take effect December 1, 2016. 

The new rules include changes to the criteria used to define overtime exemption for executive, administrative, professional, outside sales and computer employees (white collar workers) under the Fair Labor Standards Act. 

Until now, workers who earned more than $23,660 per year, or $455 per week, were exempt from overtime if they performed managerial or professional duties. Under the final rule, the salary threshold has been increased to $47,476 per year, or $913 per week.

The final rule will not only increase salary costs, particularly in the retail, hospitality and Non-Profit sectors, but employers will now be required to provide systems to keep track of hours worked. Many of these positions have not had to deal with timekeeping policies and records in the past. 

Specifics of the Final Rule

The final rule focuses primarily on the salary and compensation levels needed for white collar workers to be exempt. Specifically, the rule:

  • Sets the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region (currently the South).
  • Increases the total annual compensation required to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers, or $134,004 (up from $100,000).
  • Establishes a mechanism for automatically updating the salary and compensation levels going forward. Future automatic updates to the thresholds will occur every three years, beginning on January 1, 2020.
  • Allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. The amounts must be paid on a quarterly or more frequent basis, but a provision allows a “catch-up” payment to be made during the first pay period of the next quarter.
  • Does not change any of the existing job duty requirements to qualify for an exemption. Both the standard duties tests and the HCE duties test remain unchanged.

The final rule, which is scheduled to be published in the Federal Register on May 23, is available for preview. Additional information is available on the Department of Labor’s website.

Strategic steps for businesses

Many employers may need to account for a higher payroll or make adjustments to minimum exempt salaries. Several strategies have been suggested for employers to prepare for the implementation of the new requirements, including:

  • Increase the salary of an employee who meets the duties test to at least $47,476 annually to retain his or her exempt status;
  • Convert the employee to non-exempt status and pay an overtime premium of one-and-one-half times the employee’s regular rate of pay for any overtime hours worked;
  • Convert the employee to non-exempt status and reduce or eliminate overtime hours;
  • Convert the employee to non-exempt status and reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or
  • Implement some combination of the above.

Although the revision does not take effect until December 1, 2016, employers impacted should soon assess their options and integrate the systems needed to comply with Department of Labor’s Final Rule.

If you have questions or need assistance, please contact Yeo & Yeo.


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