Government Releases New Overtime Exemption Rule

LR-Calculator-1Late yesterday (May 17, 2016), the United States Department of Labor finally released its long-awaited new rule for determining which American workers are entitled to overtime pay – time-and-a-half for hours above forty in any workweek – and which are not. On the key issue of the salary threshold – the amount that an employee must earn, on a salary basis, to be potentially exempt from the overtime requirement – the Department backed slightly off the figure it had proposed last July, but the new threshold – $47,476 annually – is still more than twice the previous minimum salary level.

The Final Rule (available here) sets the minimum salary for exempt executive, administrative, and professional employees at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South.  Initially, that figure is $913.00 per week, or $47,476 per year.  The threshold will be updated every three years.   The amount is slightly less than the Department originally proposed, which would have been based on the 40th percentile of earnings of full-time salaried workers nationally. That approach would have resulted in a threshold salary above $50,000 annually, and would have been updated more frequently.

Recall that to be overtime exempt, an employee must not only earn at least the minimum amount on a salary basis, but must also perform exempt duties. Significantly, the Department did not change the duties tests for the “white collar” exemptions.  There was speculation that the new Rule would address the question of what proportion of an employee’s time has to be spent on “exempt duties” in order for the employee to qualify as exempt.  But the Department says it believes the new salary threshold will work effectively with the existing duties tests to properly distinguish between exempt and non-exempt workers.

Also significant is a provision in the new Rule allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary threshold.  Such bonuses and incentives must be paid out at least quarterly.

Finally, the new Rule increases the total compensation requirement for exempt “highly compensated employees” – an exemption not recognized under Connecticut law – at the 90th percentile of full-time salaried workers nationally, or $134,004 annually.

The Department has released a useful fact sheet on the new Rule, as well as an FAQ document. Unless forestalled by action in Congress, the new salary threshold will become effective December 1, 2016, so employers have less than six months to determine how to adjust to this new reality.