New Overtime Laws – A Summary

New Overtime Laws – Why is everyone talking about them?

Earlier this month, the Department of Labor (DOL) issued a final ruling which updated existing overtime pay laws.  The new ruling changes the salary level required for executive, administrative, and professional (EAP) employees to be declared “exempt”.  Exempt status means the employee is not eligible for overtime wages regardless of the number of hours he or she works.  This change is important because it could affect your business and how your employees are paid.

New Overtime Laws – What changes were made to the existing laws?

The final ruling by the Department of Labor increases the salary or wage amount required for EAP workers to qualify as exempt.  In order to be exempted from overtime pay, the EAP employee must now make $47,476 or more annually or $913 each week.  No more than 10% of the annual wage may come from non-discretionary bonuses.

Additionally, the ruling also increased the exempt wage requirements for highly compensated employees to $134,004 annually.  These employees are defined as employees performing office or non-manual work earned above the previously mentioned annual wage.  Highly compensated employees must be paid at least $913 a week in salary or fees with the remainder of the annual wage paid via commissions, incentives, and non-discretionary bonuses.

New Overtime Laws – What’s the difference between discretionary and non-discretionary bonuses?

Non-discretionary bonuses are typically performance based such as hitting a certain level of production or meeting goals.  Discretionary bonuses are those that are awarded sporadically and are not usually tied to pre-existing performance related goals.  For example: A bonus given by a contractor to an employee for Christmas would be discretionary.  A bonus given by a licensed car dealer to an employee for hitting his or her sales goals would be non-discretionary.

Non-discretionary bonuses can be used to satisfy up to 10% of the $47,476 EAP salary requirement and up to 2/3 of the highly compensated employee wage level of $134,004 (subject to a minimum salary requirement of $913/week).  However, these bonuses must be paid at least quarterly if they are to be counted towards the minimum weekly wage requirements.  Otherwise, the bonuses will not county towards meeting the minimum wage requirements for exemption and they employee will most likely qualify for overtime pay.  Employers may make a “catch-up” payment retroactively in the following quarter to ensure the employee is paid enough to be exempted.  This payment does not apply to the current quarter’s wage requirements and only to the previous quarter’s requirements.

New Overtime Laws – What do they mean for your business?

While opinions vary, most will agree that the greatest effect the new ruling will have on a business is the increased accountability of the employer as it relates to tracking an employee’s work hours.  Until now, the exemption level for EAP’s was set at a weekly wage of $455 or $23,660 on an annual basis.  A large number of middle managers often met or exceeded the $23,660 level and were declared exempt.  The low exemption requirement was easily met by employers.  The increased exemption level of $47,476 now includes a larger number of employees who may no longer meet the overtime exemption requirements.

New Overtime Laws – Tracking employee hours

Employers must now make the decision to increase wages to ensure these employees can be declared exempt or closely monitor their hours to avoid paying costly overtime wages.  Regardless, it’s always been the responsibility of the employer to keep an accurate track of the hours worked by an employee.  This is true for those employees who are considered exempt, non-exempt, and whether they are paid an annual salary or hourly wage.  Employers paid little attention to tracking the hours of exempt employees in the past knowing they would easily meet the low wage exemption threshold.  The increased wage exemption level in the 2016 ruling now forces employers to monitor these hours or possibly incur higher wage costs.

New Overtime Laws – What happens next?

The effective date of the new ruling is December 1st, 2016.  The goal is to give employers time to analyze the new exemption requirements and react accordingly.  Reactions to the new rule vary from employers who believe the new requirements will stifle job creation and employees who believe they’ll finally be paid a fair wage for the amount of hours they work.  The only known factor in the equation is that change is coming and both employers and employees must adapt to whatever outcome it brings.

For more information, please consult the Division of Labor website regarding the updated regulations of the Fair Labor Standards Act.  This article is not to be construed as legal advice and we highly suggest you contact the Division of Labor to ensure your compliance with the new laws and regulations.