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What the Updated Federal Overtime Regulations Mean for Employers

This morning the U.S. Department of Labor issued new federal overtime regulations extending overtime pay eligibility to 4.2 million more employees across the country, including over 100,000 employees in Michigan. The White House claims that this expansion will increase wages by $12 billion dollars over the next 10 years. 

Overview of New Overtime Requirements

The Department of Labor’s authority to issue the regulations derives from the Fair Labor Standards Act (FLSA), which is the federal law that sets minimum wage and overtime requirements for employers across the country. Among other things, the FLSA requires that employers pay employees 1.5 times their hourly wage for all overtime hours (hours greater than 40 in one week). The FLSA and the Department of Labor regulations, however, exempt certain “white collar” jobs from overtime pay requirements.  Since 2004, executive, administrative, and professional employees who meet certain requirements related to their job duties were not eligible for overtime pay, as long as they were paid a salary of at least $23,660 annually. The new overtime regulations more than double the minimum salary requirement. Beginning December 1, 2016, these same salaried employees become eligible for overtime pay if their salary is less than $47,476 per year.

The Department of Labor benchmarked the salary requirement to the 40th percentile of earnings for full-time, salaried workers in the lowest census region in the nation – currently, the South. Beginning in 2020, the new overtime regulations automatically update the minimum salary level every three years to stay at the 40th percentile benchmark.

The new overtime regulations also increase the overtime eligibility threshold for highly compensated employees from $100,000 to $134,000 annually.

In an unexpected employer-friendly change, however, employers are now permitted to credit bonuses and commissions earned by employees toward as much as 10% of the salary threshold.

While the Department of Labor has increased the minimum salary requirement, it has not changed the “salary basis” or “job duties” requirements of the exemptions. Generally, in order for an employee to qualify under the executive, administrative, professional, or highly-compensated-employee exemptions, the Department of Labor requires that: (1) the employee be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed ("salary basis" requirement); (2) the amount of salary paid must meet a minimum specified amount described above ("salary level" requirement); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations ("job duties" requirement). Accordingly, it is not enough for employers to merely pay salaries to their employees above $47,476 to avoid overtime pay obligations.

What this means for Employers

Employers will now have to reevaluate how they are paying salaried employees earning between $23,660 and $47,476 per year. If these employees occasionally work more than 40 hours in a week, their pay structure will have to be changed. For such employees, employers will generally have three options: (1) pay time-and-a-half for overtime hours, (2) raise the employees’ salaries above $47,476, or (3) limit the employees’ hours to 40 hours in a week. While the first two options may be costly, the third option may be difficult to monitor. For example, employers will need to be careful with employees who are permitted to telecommute and will have to implement a system to track those employees’ hours.

Employers may also need to have some difficult conversations with their employees. Some employees who have enjoyed the flexibility of salaried employment by not having to track or limit their hours will now have to record their hours or clock in and out of work. Other employees may view being salaried as a status symbol and may be resistant to being transitioned to hourly employment.

Key Takeaways from the New Overtime Regulations

The key points of the new overtime regulations are:

  • Executive, administrative, and professional salaried employees making less than $47,476 per year are eligible for overtime pay;
  • Highly compensated employees making less than $134,000 per year are eligible for overtime;
  • The minimum salary requirement is automatically updated every three years beginning in 2020;
  • Non-discretionary bonuses and incentive payments count toward up to 10% of the salary requirement;
  • There has been no change to the “job duties” requirements of the exemptions; and
  • The new overtime regulations are effective December 1, 2016.

Employers have about 6 months to prepare for the new overtime requirements. During this time, employers should carefully examine any potentially affected employees and make the necessary pay adjustments.

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