New Overtime Rules

In May, the Department of Labor issued new rules regarding exempt and non-exempt employees and overtime. The changes to the salary thresholds are dramatic, in that DOL has not made any adjustments for a number of years. Employers must implement these rules for an effective date of Dec. 1.

There is a an extensive Q&A on the Department of Labor web site (https://www.dol.gov/whd/overtime/final2016/faq.htm), but here is a summary of the new regulation, as we understand it. Some 518 pages in length, they are considerably more detailed than this, as you can imagine; even though much of these 500+ pages are explanation as to how the thresholds were set.

The New Thresholds

The new overtime law increases the salary threshold from $455 a week to $913 per week ($47,476 a year). The effect is that fewer employees will be exempt from overtime. Also, the threshold for the highly-compensated executive is increased from $100,000 to $134,004 a year. These thresholds will be adjusted for pay inflation every three years; the first adjustment scheduled for January of 2020. Of course an employer must determine which employees are exempt and which are non-exempt. The general categories of exemption are for executive duties, administrative duties, and professionals. Those rules do not change much, and you are accustomed to them, but here is a review….

The Administrative Exemption

To qualify for the administrative exemption, all of the following tests must be met….

  • Employee must be compensated by salary at a rate not less than $913 per week.
  • The employee’s duties must be the performance of office or non-manual work; directly related to the general business operations of the employer or the customers; or directly related to the management of the enterprise.
  • The EE must have as a measure of primary duties the exercise of discretion and independent judgment respecting significant matters.

The Executive Exemption

  • Again, the EE must be salaried at a level not less than $913 a week.
  • Total compensation including bonuses and other incentive comp, must be at least $134,004 a year.
  • Primary duties must be managing the enterprise or sub-division or department thereof.
  • He/she must direct the work of at least two other fulltime employees.
  • The EE must have the authority to hire and fire; or his/her recommendations for hiring and firing and promotions must carry significant weight.

The Professional Exemption

  • Must be salaried – $913 a week.
  • His/her primary duty must be work requiring advanced knowledge; work that is intellectual in nature; work with a consistent exercise of discretion.
  • “Advanced knowledge” means the fields of science or learning.
  • Finally, advanced knowledge is such that can only be acquired by prolonged specialized instruction.

As a subcategory of the professional exemption, there is a Creative Professional Exemption. This is someone paid ≥$913 a week and whose work requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

There is a IT Employee Exemption

  • This employee can be paid by salary at $913 or hourly at a rate of $27.63. (And, yes, this hourly rate totals $1,105.20 for a 40-hour week.)
  • Duties are computer system analyst, programmer, software engineer, etc.
  • The EE’s primary duty must consist of:
  • The application of systems techniques and procedures
  • The design, development, and testing of computer systems or programs
  • Design, documentation, and testing of programs related to operating systems
  • Any combination thereof

Outside Sales Exemption

  • Primary duties must be making sales or obtaining orders from customers.
  • The EE must be customarily working away from the employer’s place of business.

Blue Collar Workers

It is important to note that exemptions, regardless of how framed, do not apply to manual laborers or other “blue collar” workers who perform work with repetitive operations with their hands, requiring physical skills and energy.

Planning Ahead

The impact of these new thresholds will of course depend on how many non-exempt employees you have and the extent of overtime work you use. Clearly, if the higher salary thresholds create a new batch of non-exempt employees, to be compliant but control payroll costs concurrently, employers will need to look at some payroll options.

One option might be to increase salaries to the new salary threshold instead of paying increased time and a half. This might work for a business that has salaries already close to the threshold and/or typically pay out a lot of overtime. You’ll have to do the math: Estimate the number of overtime hours that employees work, and calculate the cost.

Otherwise, the only other option we see is to pay the overtime (time and a half for hours over 40 a week) but start seriously managing payroll costs by capping the number of overtime hours that an employee can work.

Regardless, employers may have to make some tough decisions by December 1st. What is critical to avoid complaints and legal action from employees is to talk to your people. The better informed employees are of your new rules, the less likely you will have any blow back. And, if you have specific questions regarding employee classifications and such, you will need the counsel of a labor attorney.


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