New Regulation on Employee Overtime Exemption

September 2016

On May 18, 2016, the U.S. Department of Labor - Wage and Hour Division announced the much anticipated Final Rule revising the overtime exemption for "white collar" employees under the Fair Labor Standards Act (FLSA). Under the FLSA, non-exempt employees are entitled to overtime pay (time and one-half) for working over 40 hours in one week. The "white collar" overtime exemption generally applies to executive, administrative, and professional employees: 1) paid on a salary basis, not less than the amount specified in the regulations; and 2) whose primary job duties satisfy certain minimum requirements set for the regulations. See 29 C.F.R. §541. The Final Rule did not amend the regulations concerning the job duties prong of the exemption, but significantly increased the minimum salary requirements.

The new regulations, which take effect December 1, 2016, increase the minimum salary basis to $913 a week or $47,476 annually. Since 2004, the salary basis for the "white collar" overtime exemption was $455 a week or $23,660 annually. This significant increase is in part due to the passage of time with no adjustment to the minimum salary. Under the new law, the salary basis will be adjusted every three years starting on January 1, 2020. The new regulations will also, for the first time, allow employers to use up to 10% of non-discretionary bonuses, incentive payments and commissions (if paid at least every quarter) to satisfy the minimum salary required for the exemption.

As a consequence of the new regulations, many "white collar" employees who are currently exempt will be entitled to overtime pay come December 1, 2016. Employers should identify those employees whose exemption status will be impacted by the increased salary basis and have a plan in place for compliance with the new regulations. Whether an employer opts to increase an employee's salary, start paying overtime or change staffing levels to minimize overtime hours will vary from employer to employer.

The FLSA applies to most employers with very few exceptions. The Department of Labor estimates as many as $4.2 million currently exempt employees will become entitled to overtime pay under the new regulations. Employers can minimize the costs of complying with the new regulations through proper planning. A proper plan can also reduce the risk of non-compliance with the FLSA. Employers who violate the FLSA can face expensive litigation, significant penalties, and compliance audits by the Department of Labor.

More information about the new overtime regulations can be found on the Department of Labor's website at http://www.dol.gov/featured/overtime