The Overtime Rule: What Employers Need to Know
UPDATE: On November 22, 2016, a federal judge in Texas issued a nationwide injunction blocking the enforcement of the Overtime Rule, that was to have gone into effect on December 1, 2016. The injunction is not a final decision; rather it means that it preserves the status quo. As such, employers are not required to comply with the new overtime rule, and instead should follow existing overtime regulations. Furthermore, the overtime rule could still go into effect at a later date if the Department of Labor appeals and wins its case. Approximately 4.2 million employees were expected to benefit from the new overtime rule, according to the Department of Labor.
What is the Overtime Rule?
The final overtime rule raises the salary threshold for overtime eligibility from $455/week to $913 ($47,476 per year). What this means for employers is that if you have an employee that makes less than $47,476 ($913 a week), then he or she automatically qualifies for overtime pay when they work more than 40 hours per week.
In accordance with the FLSA (Fair Labor Standards Act) employers are required to pay at least a minimum wage for up to 40 hours per week and to pay overtime for hours in excess of 40; however, many workers with at least some managerial duties who make between $23,660 and $47,476 are currently considered “exempt” from overtime pay. The Final Overtime Rule is, among other things, intended to make sure that these workers are adequately compensated, ensuring all employees that make less than $47,476 ($913 a week) automatically qualify for overtime pay when they work more than 40 hours per week.
What is the Effective Date?
Starting December 1, 2016, regular employees paid $913 per week will be eligible for overtime time for any works worked in excess of 40 hours effective on that date. Further, the exemption salary threshold for highly compensated employees (more on this below) rises to $134,004 per year. Exempt employees are not subject to overtime pay.
Future automatic updates to salary threshold amounts will occur every three years, beginning on January 1, 2020. The Department of Labor will publish all updated rates in the Federal Register at least 150 days before their effective date, and also post them on the Wage and Hour Division’s website.
Are all Businesses Affected by the new Overtime Regulations?
All businesses are affected by the overtime regulations; however, because the overtime regulations fall under the FLSA, only businesses with gross annual sales of $500,000 or that are engaged in interstate commerce must comply with the new overtime rule.
How does the new Overtime Rule affect a Highly Compensated Employee (HCE)?
The Final Rule sets the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually).
To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test. The HCE annual compensation level set in this Final Rule brings this threshold more in line with the level established in 2004 and will avoid the unintended exemption of large numbers of employees in high-wage areas who are clearly not performing EAP (executive, administrative, and professional) duties.
Are Commissions or Bonuses Included in the Salary Calculation?
Up to 10 percent of total compensation meeting the salary threshold amount can be in the form of bonuses or commissions. Prior to the new rule, employers were not permitted to count these forms of compensation toward meeting the minimum salary threshold for overtime.
Employers will now be able to use non-discretionary bonuses and incentive payments such as including commissions to satisfy up to 10 percent of the standard salary level. However, for employers to credit non-discretionary bonuses and incentive payments toward a portion of the standard salary level test, payments must be paid on at least a quarterly basis. It is the employer’s discretion when the quarter will begin (i.e. not necessarily a calendar quarter).
Example: You pay an employee $821.70 per week and s/he also receives a bonus of $1,186.90 every quarter. The base pay plus the bonus ($91.30 x 13 weeks in a quarter) is equivalent to paying your employee a salary of $913 per week.
The Final Rule also allows an employer to make a “catch-up” payment. Catch-up payments are made when an employee doesn’t meet their sales quota in a given quarter (and doesn’t earn their expected quarterly commission) but exceeds a sales quota during the next quarter. In this case, an employer is able to make a catch-up payment and avoid paying overtime compensation.
Example: Let’s say your employee typically earns a commission of at least $1,500 every 13 weeks (quarter). You pay the employee a weekly salary of $821.70 (90 percent) and anticipate applying the 10 percent bonus commission ($91.30) toward the total salary requirement of $913 per week. However, the employee doesn’t meet his sales quota and only earns a commission of $1,000 or $76.92 per week, which is $14.38 less than required to meet the $913 per week requirement. In this example, employers are allowed to make a catch-up payment in the next quarter of $186.94 ($14.38 x 13 weeks) to maintain the employee’s exempt from overtime status.
Nondiscretionary bonuses. A form of compensation promised to employees, for example, to induce them to work more efficiently or to remain with the company.
Discretionary bonuses. The decision to award the bonus and the payment amount is at the employer’s sole discretion. For example, a previously unannounced holiday bonus qualifies as a discretionary bonus, because the bonus is entirely at the discretion of the employer, and therefore could not satisfy any portion of the standard salary threshold level of $913 per week.
Note: For businesses that pay employees large bonuses the amount attributable toward the standard salary level is capped at 10 percent of the required salary amount.
Non-discretionary bonuses and commissions continue to count toward the total annual compensation requirement for highly compensated employees ($134,004) as long as the HCE receives at least the full standard salary amount each pay period ($913).
What are my Options as an Employer?
While the new overtime regulations don’t specify exactly what actions employers need to take, there are a number of ways that employers can comply such as:
- Increasing workers’ salaries so they are exempt from the overtime salary threshold
- Paying the mandatory time-and-a-half for overtime hours in excess of 40 hours per week
- Limiting workers to 40-hour work weeks so there is no overtime
- Reducing base salaries, but keep overtime pay with the goal of keeping weekly pay the same
- Using a combination of the above
Are you Ready for the new Overtime Rule?
The best way to prepare for the new overtime rule is to understand how it works and how it will affect your business and your employees.