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The New Overtime Regulations: What Employers Need to Know

For the first time since 2004, and only the seventh time since the Fair Labor Standards Act was enacted, the United States Department of Labor has dramatically increased the salary level requirements in order for employers to avoid the payment of overtime to salaried executive, administrative and professional employees.  Since 2004, employers were able to classify employees as exempt executive, administrative or professional employees based on a two-part test, a minimum salary of $455 per week and a duties test applicable to each of the three exemptions.  While the duties tests will not change, the new regulations more than double the minimum weekly salary threshold, raising the minimum weekly salary from $455 per week to $913 per week.  The threshold for highly compensated employees will increase to $103,004.  According to some estimates, the new regulations will mean that 35 percent of full-time salaried workers will now qualify for overtime as of December 1, 2016 based solely on the new salary threshold.  The Department of Labor reports that 4.2 million workers will now be entitled to overtime protection.  The overtime rules go into effect on December 1, 2016. 

The new regulations were promulgated in response to a Presidential Memorandum issued by President Obama in 2014 in which he directed the Secretary of Labor to update and modernize the rules so that both employers and workers were better able to determine overtime eligibility.  In 2004, the Department of Labor nearly tripled the salary requirement while also attempting to simplify the duties tests.  At that time, the minimum salary threshold was set at $455 per week, but there was no method in place to update the salary requirement contained in the regulations.  Worker advocates complained that the lack of salary increases coupled with inflation meant that, over time, the real value of the salary threshold was defeated, thereby allowing employers to escape overtime pay for lower paid workers in need of the compensation. 

The new regulations attempt to address these concerns by not only increasing the current salary threshold, but also including an automatic update to the threshold every three years beginning January 1, 2020 to account for inflation based upon wage growth over time.  For the first time, the regulations have also attempted to address changes in the payment of wages since the Fair Labor Standards Act was enacted by recognizing that non-discretionary bonuses, incentive pay and commissions, up to 10 percent of the salary threshold, can also be applied to satisfy the salary level requirement.  The Department of Labor will post updated salary levels 150 days in advance of the January 1, 2020 effective date, beginning August 1, 2019. 

Stay tuned for further updates, however, because 21 states have filed suit to contest implementation of the regulations, arguing that the Department of Labor exceeded its rule-making authority.  In addition, local and national business groups including the U.S. Chamber of Commerce have filed similar challenges.  The cases are pending in the United States District Court for the Eastern District of Texas and have been assigned to a federal judge appointed to the bench by President Obama.  The lawsuits have only recently been filed and their outcome is far from certain.

Impact on Employers

  • The new salary threshold will provide a bright line for determining eligibility.
  • Employers will use the same duties test to determine exempt status of employees meeting the salary threshold.
  • With the new salary threshold being updated every three years, employers must be diligent in obtaining salary update levels and planning accordingly.

Employer Choices

The new rule increases the number of workers who are eligible for overtime pay when they work more than 40 hours in a week.   Employers, however, are not without choices.

  • Employers can increase salaries to the new salary threshold, thereby limiting overtime liability for executive, administrative and professional employees who meet the existing duties test.
  • Employers can manage work hours to limit the number of employees who work in excess of 40 hours in any workweek.
  • Employers can hire additional employees to balance the number of hours worked so that employees are not required to work overtime.
  • Employers can utilize timekeeping systems to better track employee hours and avoid payment for non-working time.
  • Employers can reclassify salaried employees to hourly and pay workers for any hours in excess of 40 hours in any workweek.

It is recommended that employers stay ahead of the latest changes in employment regulations by contacting legal counsel to address further questions or concerns.

Paul M. Finamore (pmfinamore@nilesbarton.com) is a Partner at Niles Barton, & Wilmer LLP in Baltimore. Mr. Finamore regularly counsels employers on employment issues, workplace policies, and compliance with federal, state, and local employment laws.

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