Did you know that salaried employees may now be eligible for overtime pay? In May of 2016, President Barack Obama and United States Labor Secretary Thomas Perez announced the final rule updating overtime regulations that would extend overtime protection to over 4 million workers.
The basic principal of this law that salaried employees that are below the threshold of $47,476 per year now will be eligible in most cases to earn overtime compensation should they work over 40 hours per week. According to the DOL website a fixed salary for a regular workweek longer than 40 hours does not discharge FLSA statutory obligations. For example, an employee may be hired to work a 45 hour workweek for a weekly salary of $405. In this instance the regular rate is obtained by dividing the $405 straight-time salary by 45 hours, resulting in a regular rate of $9.00. The employee is then due additional overtime computed by multiplying the 5 overtime hours by one-half the regular rate of pay ($4.50 x 5 = $22.50).
The rule addresses the standard salary level. The Department of Labor sets the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week, equivalent to $47,476 per year for a full-year worker).
The standard salary level set in this Final Rule addresses the conclusion that the salary level set in 2004 was too low, given the Department’s elimination of the more rigorous long duties test. For many decades the long duties test—which limited the amount of time an exempt employee could spend on nonexempt duties, and was paired with a lower salary level—existed in tandem with a short duties test, which did not contain a specific limit on the amount of nonexempt work, and was paired with a salary level that was approximately 130 to 180 percent of the long test salary level.
In 2004, the long and short duties tests were eliminated, and the new standard duties test was created based on the short duties test and was paired with a salary test based on the long test. The effect of the 2004 Final Rule’s pairing of a standard duties test based on the short duties test (for higher paid employees) with a salary test based on the long test (for lower paid employees) was to exempt from overtime many lower paid workers who performed few EAP duties and whose work was otherwise indistinguishable from their overtime-eligible colleagues.
This has resulted in the inappropriate classification of employees as EAP exempt who pass the standard duties test but would have failed the long duties test. The Final Rule’s salary level represents the most appropriate line of demarcation between overtime-protected employees and employees who may be EAP exempt, and the Rule works appropriately with the current duties test, which does not limit non-EAP work.
The Department also is updating the special salary level for employees in American Samoa (to $767 per week) and the special “base rate” for employees in the motion picture industry (to $1,397 per week).
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative, and Professional workers to be exempt. Specifically, the Final Rule:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.