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On May 18, 2016, the United States Department of Labor announced the release of its final rule updating overtime regulations that will impact over 4 million American workers and employers across the United States.

New Rule Brings Four Primary Changes

The final rule, which will go into effect December 1, 2016, focuses primarily on updating salary and compensation levels needed for executive, administrative and professional employees. It will implement these four primary changes:

  • - the salary threshold below which most salaried workers are guaranteed overtime will double from the 7th percentile of earnings - $455 per week or ($23,660 annually for a full year worker) to the 40th percentile of earnings - $955 per week ($47,476 annually for a full year worker). This salary threshold is reflective of the 40th percentile of workers in the lowest income census region in the United States;
  • - increases the total annual compensation requirement for highly compensated employees subject to a minimal duties test from $100,000 to $134,004 which represents the 90th percentile of full time salaried workers nationally;
  • - establishes a mechanism for automatically updating salary and compensation levels every three years to maintain levels at the stated percentiles; and
  • - allows employers to use non-discretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the new standard salary level.

The Department felt the changes were necessary to fix a broken system that has failed to keep up with the rising cost of living. Overtime protections were initially put into place by the Fair Labor Standards Act of 1938 which established the standard of paying employees time and a half for all hours worked over 40 in a work week. The general rule is that all employees are entitled to overtime unless they make more than the salary threshold set by the Department and pass a test demonstrating that they primarily perform executive, administrative or professional duties. In 1975, the threshold extended coverage for more than 60% of American workers making them eligible for overtime pay based on their compensation. Today, only 7% of workers are eligible under the current threshold. The new Rule is aimed at ensuring that the salary threshold is maintained at the 40th percentile of workers in the lowest income census region in the United States.

Options for Employers

What does this mean for employers? Coverage will be extended to 4.2 million additional workers not currently eligible for overtime under Federal Law. In addition, the rule change is anticipated to raise wages paid by employers to the tune of $12 billion over the next ten years. Employers are now faced with the decision of how to combat the anticipated increase in costs to do business. The simple answer is to pay the overtime when required. Another option is to raise an employee’s salary to the new threshold level. Finally, and what is the most likely result, employers will be required to evaluate and realign staff workload and distribution.

Whichever option is chosen, employers must be certain to review and revise their salary structure to meet the requirements of the new rules and to maintain records sufficient to demonstrate that workers are being paid for the hours they work. You can be certain that the Department of Labor will be watching closely.