You will soon see big changes to who in your company qualifies for overtime exemption. The Department of Labor is updating the Fair Labor Standards Act that will drastically change the overtime rules for salaried employees.
On May 18, 2016, President Barak Obama and Secretary Perez announced the Department of Labor’s final rule that updated the FLSA’s overtime rules for salaried employees classified as Executive, Administrative, and Professional workers. The changes will go into effect on December 1, 2016.
New Overtime Rules for Salaried Employees
Under the new ruling, the salary threshold will raise to the 40th percentile of earnings for all full-time salaried workers, increasing automatically every three years. Under the new Department of Labor ruling the overtime threshold will increase to $47,476, or $913 per week. The first increase is expected January 1, 2020 with a new wage threshold of over $51,000.
The key takeaways of the new ruling include:
- A set standard salary level at the 40th percentile of earnings for full-time salaried workers in the lowest-wage Census Region. ($47,476 annually, or $913 a week)
- A set total annual compensation requirement for highly compensated employees to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004) , subject to a minimal duties test.
- An established mechanism to automatically update the salary and compensation levels every three years to maintain the levels at the appropriate percentiles, as well as to ensure they continue to provide useful and effective tests for exemption.
- The final rule also amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new standard salary level.
Former Overtime Rules for Salaried Employees
Previously, the salary threshold for salaried employees was $23,660, or $455 per week. Until now, this number has not been updated since 1975. The overtime rules for salaried employees were set in place for highly paid, white-collar employees during the 1970s, at which the minimum salary was considered a highly paid salary.
The overtime rules for salaried employees are set by the Fair Labor Standards Act. The FLSA was established to protect employees’ wages, govern laws on minimum pay, regulate overtime pay, help employers to have proper record keeping, and set rules on child labor effective employees in the private and government sectors. Under this law, nonexempt employees are entitled to a minimum wage of at least $7.25 per hour. The law also declares that overtime pay will be paid at a rate no less than one and one-half times the regular rate of pay after an employee has worked more than 40 hours of work in a workweek.
Who Benefits From This Change?
The Department of Labor estimates that nearly 4 million workers will benefit from the new overtime rules for salaried employees. This number includes a wide-range of white collar workers, including executive, administrative, and professional employees. According to the Department of Labor, the goal of this plan is to grow the middle class by supporting American workers.
Previously, certain professional and managers were exempt from overtime if they made more than $23,660 a year and perform specific job duties. This is less than the current poverty threshold of $24,008 for a family of four.
How This Change Affects Employers
The new overtime rules for salaried employees mean more employees will be eligible for overtime pay. This is will result in higher payroll costs starting 2016 and going forward for employers. To prepare for this change, employers should reevaluate the salaries employees receive, as well as their job descriptions.
Many employers mistake classifying an employee exempt just he or she is paid a salary. Non-exempt employees do not strictly have to be paid an hourly wage. However, employers are required to pay non-exempt employees overtime for any hours worked over 40 in a workweek.
Examples of how you can be proactive preparing your business for this change are:
- Identify exempt employees making under $47,476 per year or $913 per week
- Determine how many of those employees had overtime hours during 2015
- Calculate the cost of overtime
- Determine if it makes sense to increase the employee’s salary or pay the overtime premium
- If it is not cost effective to increase the salary, you will need to determine how to accurately record the employee’s time worked
It is important to keep up with these changes because fines for not complying with the new law could cost your business $1,100 per violation, as well as up to $10,000 in additional fines. There is also a chance you could be criminally prosecuted for non-compliance.
Do you need help ensuring your business is compliant with the new overtime rules for salaried employees? Let our team of Human Resources and Payroll experts help. We can evaluate your staff’s current salary levels, as well as your current job descriptions to help you avoid underpaying your employees and potential fines from the Department of Labor.