The United States Department of Labor (DOL) has issued new rules governing overtime pay that will automatically extend eligibility for overtime pay to approximately 4.2 million workers. Under the new rules, which go into effect on December 1, 2016, most salaried workers making less than $ 913.00 a week ($ 47,476.00 a year) will be entitled to collect overtime pay. . This new prescribed wage level is more than double the current amount ($ 455.00 per week or $ 23,660.00 per year) at which workers are generally considered exempt from overtime rules.
A brief summary of the Fair Labor Standards Act (FLSA) is helpful in understanding what is happening here. The FLSA requires employers to pay their employees at least the federal minimum wage (currently $ 7.25 per hour) for all hours worked and overtime pay at a rate of 1.5 times their regular pay rate for all hours worked. in excess of 40 in a job. week. Certain categories of employees are exempt from the Act’s coverage, including doctors, lawyers, and teachers. In addition, the FLSA exempts from coverage employees who perform in an “executive, managerial, or professional capacity.” Historically, these workers have been referred to as “white collar workers”. However, the Act itself does not define the terms “executive,” “administrative,” or “professional,” leaving the DOL with the task of issuing regulations that define the scope of these exemptions.
Current DOL rules require an employee to meet each of the following three tests to fall within the white collar exemption: (1) they are paid a predetermined, fixed salary that is not subject to reduction for quality or quantity work performed (the “wage basis test”); (2) the amount of the employee’s salary meets a specified minimum amount (the “salary level test”); and, (3) the employee’s duties involved executive, administrative, or professional duties, as defined in DOL regulations (the “duty test”). The recently issued rules impact the second of those tests, the “salary level test.”
So, effective December 1, when the new rules go into effect, most white-collar workers who earn less than the “standard wage level” of $ 913.00 per week will be entitled to overtime for hours worked in Exceeding 40 in a given workweek. . That will be the case regardless of whether these employees meet the other two tests for the white collar exemption. This standard salary level was determined according to the 40th percentile of the income of full-time salaried workers in the lowest-wage region of the country, currently the South. Going forward, the standard wage level will be subject to adjustment every three years, again, by reference to the 40th percentile of full-time salaried workers in what is then the lowest-wage region in the country.
Employers may use nondiscretionary bonuses and incentive payments (such as commissions) to satisfy up to ten percent of the standard salary level, provided these payments are made quarterly or more frequently.
Finally, the new regulations also affect those who are considered “highly paid employees” (HCE) under the law. Currently, employees whose annual earnings are $ 100,000.00 or more are generally exempt from the overtime rules, even if they do not meet the “duty test.” When the new rules go into effect, the applicable dollar amount to qualify as HCE will increase to $ 134,004.00.
The DOL estimates that approximately 4.2 million workers currently considered exempt under the FLSA will be entitled to overtime in the first year of implementation of these new rules. That number is expected to grow to more than 5 million workers within ten years of implementation. An additional 65,000 HCE are estimated to be eligible for overtime in the first year after the rule change, and 200,000 will be affected within ten years.
Clearly, many employers will be affected by these changes and employers are encouraged to understand how these new rules will affect their payroll practices.
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