New Overtime Rules Have Far-Reaching Effects

This week the Obama Administration released a final rule, effective December 1, 2016, which significantly raises the salary threshold for workers to qualify for overtime. Previously, many employees who earned to $23,660 were entitled to overtime pay at time-and-a-half compensation for any hours worked in excess of forty during the week. Under the new rule, the threshold is now at $47,476, meaning that many employees who make up to $913 per week are entitled to time-and-a-half compensation if they work over 40 hours per week. In addition to raising the threshold for exempt employees, the Rule also raises the threshold to be considered a “highly compensated employee” under the Fair Labor Standards Act from $100,000 to $134,004 annually.

In determining what an employee’s salary is for the purposes of deciding whether the employee is exempt, the new Rule allows the inclusion of nondiscretionary bonuses and incentive payments (including commissions), to up to ten percent of an employee’s salary. The rule with respect to highly compensated employees remains the same.

In addition to raising the baselines, the Rule also incorporates a mechanism for the thresholds to update automatically on a three year basis, beginning in 2020. The salary and income thresholds will stay current with the 40th percentile of weekly earnings for those full-time salaried workers in whichever U.S. Census Region has the lowest wages (typically the South). The highly compensated employee exemption will track the 90th percentile of annual earnings for full-time salaried workers across all Census Regions.

The rule does not change who is considered exempt and non-exempt and makes no amendments to the duties test for either regular employees or highly compensated employees.

As a refresher, in order to be considered an exempt employee, the employee must be paid on a salary basis, not an hourly basis, and pay must not be subject to reduction because of the quality or quantity of the employee’s work. The employee must be paid in excess of $913 per week ($47,476 per year). Finally, the employee’s primary duties must satisfy the standard duties test, which means it is that sort of work typically associated with executive, administrative, or professional employees.

Prepared by: Melanie Leitman
Labor & Employment Law Practice Group
[email protected]